Best of the Week
Most Popular
1.The Greatest Stock Market Crash Of Your Life Is Just Ahead… – Warns Harry Dent - GoldCore
2.Budget 2016: Borrowing, Lifetime ISA, House Prices, Economy, Syria, Brexit and Stocks - Nadeem_Walayat
3.Gold Price Intermediate Top - Clive_Maund
4.Brussels Terror Attacks, Death of the European Union, BrExit Wake up Call - Nadeem_Walayat
5.Stock Market Maybe This Time is Different? - Tony_Caldaro
6.UK House Asking Prices Break Above £300k! Housing Market Paralysis - Nadeem_Walayat
7.A Big Reason Why Silver Price Is Set To Soar - Hubert_Moolman
8.The Financial Crisis Has Just Begun; Is The American Dream Is Over? - Chris_Vermeulen
9.Gold Stocks Spring Rally - Zeal_LLC
10.GLX, GLDX, Baby Gold Bull Market Stillborn? - Rambus_Chartology
Last 7 days
Silver: The “Five Year Plan” and the Great Leap Forward - 28th Apr 16
Michael Hudson: The Wall Street Economy Has Taken Over The Economy and Is Draining It! - 28th Apr 16
AUD/USD - Trend Reversal or Just a Bigger Pullback? - 28th Apr 16
A Gold Revaluation Could Transform Your Financial Status - Overnight - 28th Apr 16
Monetary Policies Misunderstood - 28th Apr 16
Gold Bullion vs Gold Miners - 28th Apr 16
OECD Suggests BrExit Would Cut Net Migration by 1.2 Million by 2030 - 28th Apr 16
MP Naz Shah Punished for Tweets Made During Israel's Genocide of Gaza Palestinian People - 28th Apr 16
Global Recession in 2016 and Beyond - The Obvious Evidence - 27th Apr 16
Why Gold Bugs Need to Stop Listening to The Fear Mongers and Start Thinking for a Change - 27th Apr 16
BlackRock’s Fink: Fed to Raise Interest Rates by Quarter Point ‘at Best’ - 27th Apr 16
Gold More Productive Than Cash?! - 27th Apr 16
Donald Trump Will Fire Janet Yellen and Be Trapped - 27th Apr 16
Money Saving Gardening by Propagating Roses From Cuttings - Propagating Rose Plants Over 2.5 Years - 27th Apr 16
Facebook Censors Pro Trump and Negative Hillary News - 27th Apr 16
This is the Era of the Democrats and Your Taxes are Going Up - 27th Apr 16
Long Awaited Gold Price Breakout - 26th Apr 16
Crude Oil Price Double Top or Further Rally? - 26th Apr 16
Madness in the Crimex Gold and Silver Trading Pits - 26th Apr 16
Britain's Prospects: GBP and BREXIT - MAP Wave Analysis - 26th Apr 16
CRB, Gold, Oil, Cotton, Coffee - 7 Must See Commodities Charts - 26th Apr 16
Gold Price Target is $3,000 and Silver is $75 per Ounce - 25th Apr 16
Parameters for a Stock Market Sell Signal-in-the-making - 25th Apr 16
Stock Market Dangerous Divergence - 25th Apr 16
Gold Miners Nub is the Sweat of the Sun - 24th Apr 16
US Dollar Price Forecast - 24th Apr 16
Stock Market Upside Objective Reached - 24th Apr 16
Why Leftist Greeks have more reasons than Liberals to favour Entrepreneurship and Support Entrepreneurs - 24th Apr 16
The Dow Jones is a Catalyst for Misplaced Stock Market Optimism - 24th Apr 16
Why Russia Harasses U.S. Aircraft and Ships - 24th Apr 16
Stocks Bull or Bear Market Rally? - 23rd Apr 16
A Bright Future for Solar Power in the Middle East - 23rd Apr 16
Silver Commitments of Traders – Halloween is Arriving Early This Year - 23rd Apr 16
Good News, Bad News, Both Favor Gold And Silver - 23rd Apr 16
Mish's Sure Fire Proposal to End Japanese Deflation - 23rd Apr 16
Mish Shedlock: “EXCUSE ME MR. PRESIDENT, IS THAT A JOKE?” - 23rd Apr 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Catching a Falling Financial Knife

Inflationary Pause Before the Deflationary Collapse

Economics / Great Depression II Dec 31, 2009 - 12:54 PM GMT

By: Janet_Tavakoli

Economics

Best Financial Markets Analysis ArticleWashington's Bipartisan Betrayal: The 2015 Global Financial Crisis - The time has come for new year's resolutions. The House passed the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) on December 11, 2009. It gives $4 trillion in "emergency funding" to our largest banks during the next financial crisis. Instead of reform, Congress offers even bigger bailouts. Unless we change direction, we will have another crisis by 2015. Congress has made all the wrong moves to guarantee it.


The economy did not just have a heart attack; we are suffering from financial appendicitis. Instead of doing the necessary surgery, Congress is prescribing potent addictive painkillers.

How did we get here? Housing is the largest component of our economy. Cheap money from the Federal Reserve, crippling of states rights to reign in mortgage lenders, and failure to enforce securities laws allowed the largest Ponzi scheme in the history of the capital markets to flourish.

Wall Street's shadow banking system gave mortgage lenders large credit lines (similar to credit card debt) and packaged the loans into private-label residential mortgage backed securitizations. Most of each deal was rated "AAA," since subordinated investors absorbed the risk of a pre-agreed amount of loan losses. But hundreds of billions of dollars in private-label deals were backed by portfolios comprising risky fraud-riddled loans. Most of the "AAA" investment was imperiled, and subordinated "investment grade" components were worthless. Wall Street disguised these toxic "investments" with new value-destroying securitizations* and related credit derivatives.

Meanwhile, collapsing mortgage lenders paid high dividends to shareholders (old investors) and interest on credit lines to Wall Street (old investors) with money raised from new investors (perhaps your pension fund) in doomed securities. New money allowed Wall Street to temporarily hide losses and pay enormous bonuses. This is a classic Ponzi scheme.

The following is an April 19, 2009 C-Span Video**:


When you leverage fraud riddled fixed income securities priced at 100 cents on the dollar, there is nowhere to go but down in a hurry. Confusion after the fraud fell apart led to a vicious cycle of selling as investors and lenders shunned both good and bad assets. The deflating debt bubble was followed by a classic liquidity crunch resulting in a global crisis.

Wall Street protests that it sold toxic assets to sophisticated investors obliged to perform independent investigations of the risk. That argument no longer applies. U.S. taxpayers became unwilling unsophisticated investors funding Wall Street's bailout.

Other parties--mortgage bankers, credit rating agencies, hedge funds, credit rating agency, insurers, mortgage brokers, regulators, Congress, and the Federal Reserve Bank--were supporting actors. If Wall Street's financial meth labs had been shut down earlier, the money machine would have stopped running.

Recent arguments blame Fannie Mae and Freddie Mac, the indirect mortgage lending giants. This is misguided. The largest slug of new risky products and bad loans were created to fuel Wall Street's private-label securitizations. Fannie and Freddie were more at the effect than the cause (not blameless, but not the largest cause of the housing bubble). Now that shadow banking is dead, they are being stuffed with even more bad product to pick up the slack.

Fannie Mae and Freddie Mac are the new motor for no-money-down mortgage loans and a host of new problems. The fraudsters involved with our last crisis went unpunished, and they will help create our next crisis. This brewing fraud fest will result in greater misery and systemic risk. Instead of reform, Congress responded on Christmas Eve by agreeing to cover unlimited loan losses.

Bank depositors' money is guaranteed, if deposits are below the current FDIC deposit insurance limits. Banks did not need to be bailed out to protect depositors. We bailed out banks' other creditors with public money. We are printing so much money that now depositors should worry about inflation.

Inflation is the great destroyer. Inflation will wipe out investment gains (and more) much more quickly than taxes. If you earn, say, 5% on your deposits, 5% inflation will wipe out your gains, (and you aren't earning 5% on your deposits or treasury notes in the first place). That is worse than any current or proposed tax rate, since that would translate to a 100% tax rate.

Wall Street, Fannie Mae, and Freddie Mac supply a swinging door of jobs and paid projects for its financial regulators, Congressmen, appointed administration officials, and investigation committee staffers. Many members of Congress and our Presidents have received massive campaign contributions funded by Wall Street. This dependence is known as "capture," and the result is that instead of reigning in Wall Street, dependent thinking enables mayhem.

We have an alternative to bailouts, one that does not violate the spirit of democracy. Troubled financial entities should be put into receivership and restructured. Old shareholders will be wiped out. Debt-holders will take a haircut (discount) along with a debt for new equity swap to recapitalize the entity. But the job won't be complete until we separate high risk activities from traditional banking in return of Glass-Steagall, indict fraudsters, snuff out systemic fraud, and allow honest bankers to prosper.

After the Savings and Loan crisis of the late 1980's, there were more than 1,000 felony indictments of senior officers. Recent fraud is much more widespread and costly. The consequences are much greater. Congress needs to fund investigations. Regulators need to get tough on crime.

The fact that many U.S. banks stuck to traditional banking and protected shareholders during this crisis is under-publicized, but their prudence worked.

We have the solutions. We need the political will to implement them.

* Collateralized Debt Obligations (CDOs and CDO-squared), Structured Investment Vehicles (SIVs), Real Estate Mortgage Investment Conduits (REMICs and Re-REMICs), Asset Backed Commercial Paper (ABCP), and related credit derivatives. Wall Street also engaged in suspect securitizations of some credit card receivables, auto loans, bank trust preferred securities, commercial real estate loans, and a variety of corporate loans.

**When asked whether or not certain individuals had done anything illegal, I responded that I did "not think anyone did anything illegal, because Congress did not pass laws to make it so," because I did not want to scapegoat individuals. I should have said: "That is up to the Department of Justice to determine."

By Janet Tavakoli

web site: www.tavakolistructuredfinance.com

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

© 2009 Copyright Janet Tavakoli- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife