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Wednesday, September 24, 2008

Financial Meltdown; Who To Blame?

The last two days I have listened to Federal Reserve chairman Ben Bernanke and US Treasury Secretary Hank Paulson testify before congress in favor of a $700 Billion package to "bailout" the financial markets and the US economy.

There is an old cliche that applies. It says when a person with money meets a person with experience, the person with the experience leaves with the money and the person with the money ends up with an experience. Usually Wall Street has the experience while tax payers and greedy investors start out having the money.

To me, blaming Wall Street it is similar to blaming the great white sharks off our California coast for eating the occasional surfer.

Earlier today Warren Buffett said this is an "economic Pearl Harbor" we are going through. When asked what would happen if the package proposed by Paulson and Bernanke fails to get quick approval, Buffett said
It will get worse. Last week will look like Nirvana if they don't go through with a plan to get the country back on the right track. Huge institutions in the World all want to deleverage at the same time. We need someone large, like the US government, to step up and provide liquidity. If they do it right, and I think they will, then the US Government will make a lot of money.
[See Warren Buffett on Goldman Sachs and Financial Bailout Package.]
When asked about punishing those responsible, Buffet said
I think the CEOs and directors should be punished for what they did, but I would not write this into the legislation.
Am I the only one who finds it odd that nobody is blaming:
  • The people who took out loans they could not pay back?
  • The schools for not teaching people enough to understand compound interest or that what goes up in price often crashes faster than it went up?
  • The people who bought homes as "investments" that went down in price? I know many here in California who were speculating on being able to sell for a quick gain before their teaser loan rates turned into very expensive loans. They gambled and lost just like some of us lost buying troubled stocks that went out of business.
If all the "sub prime" borrowers were smart enough to know
  • that their house would not keep going up forever
  • that they could not afford to pay their mortgages when the intro rates ended
  • that their house could plummet in value if they were the last one to buy before the housing bubble collapsed
then we would not be in this problem because the sharks on Wall Street could not take advantage of them.

The fault seems to be in regulations that didn't step up and notice many were getting toxic loans they didn't understand. At the peak of the bubble, my housekeeper was thinking of buying a house in the area of San Jose that is now off 40%. I took a few minutes to explain to her how dangerous the loans were that she would "qualify" for and the only one who PROBABLY will come out ahead in a few years is the person who gets a fee to get her to sign the papers. I explained to her what was happening and told her to not sign ANY papers until she let me look them over to see if she was getting screwed and could afford the payments should the economy sour where people decided to clean their own houses or her husband lost his job building new homes.... She didn't buy and they are doing fine as renters... and her husband cleans carpets now so they can pay their bills, drive nice cars and care for their kids.

If you really want to fault people
  • Fault the schools for keeping people stupid about math and compound interest.
  • Fault a society that pushed huge homes and expensive SUVs on people who could be happy with half the lifestyle and far less debt.
  • Finally, fault the greedy people who closed their eyes to the risks just like they do when they buy lotto tickets or trips to Las Vegas. One multimillionaire friend (at least he was two and a half years ago) asked for my advice about an $800,000 condo in Vegas he paid $4000 for the right to bid on (got a refund when his bid was accepted). I told him I would look to sell immediately as that was the classic sign of a top when they find people who will pay a finders fees to buy stuff that has not been built yet. He was so mad he did not set up the planned lunch to balance my buying him his lunch nor would he return my emails! Now I bet he wishes he listened to me.
Sure the people at the top knew their were selling loans to people that could not pay them back. Just as I have no problems killing great white sharks that eat humans, I believe the CEOs and directors at these failed companies should be punished. They had a duty to shareholders to manage their companies for the future. They should be held accountable in civil court by shareholders to disgorge every penny they made but lets not forget that the reason the sharks got so rich is the waters were filled with clueless swimmers.

9 comments:

  1. Kirk, that is a very good assessment of blame. Reminds me of lyrics in a Rush song, "Nobody's blameless but they're all without shame".

    The home buyers who took out homes they could not afford will be punished when they lose their homes. And they will be punished in various ways their whole lives if they do not learn basic math and compound interest principals. But the financial firm execs have already pocketed their hundreds of billions of dollars in bonuses for being a player in other peoples ignorance. I just don't want them to profit any more than they already have. A doctor can be banned from practicing medicine if they commit gross malpractice. A lawyer can be dis barred. These financial execs should be banned from having anything to do with other peoples money ever again for THEIR gross negligence.

    ReplyDelete
  2. “Fault the schools for keeping people stupid about math and compound interest.”

    Capt. Kirk,
    Breeding “the American People” to be dopes (to steal their money via “legal” schemes) is part and parcel of the America’s ruling elite, the corporate Crooks, and the whole econo-political system is designed around it. Since you are informed on investments would you be kind enough to tell us all for how long have long-term UST STRIPS out-performed S&P500 and Warren Buffett (BRKA) on a total return basis?

    Who To Blame? I say blame Jas Jain, who with his gloom and doom nonsense is causing the crisis single-handedly. :-) Seriously, blame all the economists who were giving inflated estimates of the housing demand contrary to what the Census survey data were indicating. Blame all the officials who were first denying the hosing bubble and then downplaying the “sub-prime” crisis. Bernanke said in March 2007, “Housing prices in the US as a whole will not decline; the rate of increase in prices will decline to 3-5%.” Talk about the clueless. Americans have no idea how much of a moron Bernanke really is. He indirectly admitted during the hearings that he was caught off guard because things (e.g., financial system) have changed so much since the 1930s! Talk about generals fighting the last war!! Only a total moron can be made to believe that Bernanke can avoid depression. Just the opposite, he has guaranteed a worse depression by allowing bad lending to go on so long. Please remember that depressions are caused by “bankers’ mischief.” Bernanke is a horrible "banker." Hell, he is an academic. Only a moron appoints academic to oversee Crooks. (Bush has been confirmed as a moron on multiple counts).

    Best regards,
    Jas

    ReplyDelete
  3. Jas Jain wrote "Please remember that depressions are caused by “bankers’ mischief.” "


    Jas, I believe it is well accepted that the cause of the great depression is debatable.

    Wiki has a good summary at http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression

    I believe Milton Friedman is the wisest ever and his belief was:

    Essentially, the Great Depression, in the monetarist view, was caused by the fall of the money supply. Friedman and Schwartz write: "From the cyclical peak in August 1929 to a cyclical trough in March 1933, the stock of money fell by over a third." The result was what Friedman calls the "Great Contraction"— a period of falling income, prices, and employment caused by the choking effects of a restricted money supply.

    Bernanke accepts this:

    Ben Bernanke, the current Chairman of the Federal Reserve, later acknowledged that Friedman was right to blame the Federal Reserve for the Great Depression, saying on Nov. 8, 2002:

    "Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again." [8]


    Yesterday BOTH Bernanke and Paulson told congress that all the parts that make a depression will probably happen if we don't take quick action to free up the credit markets.

    ReplyDelete
  4. Let me add that what the "bailout package" is attempting to do is intervene in the vicious cycle of forcing liquefaction of assets at depressed prices to meet reserve requirements.

    Friedman suggests the untested hypothesis that if a policy similar to 1907 had been followed during the banking panics at the end of 1930, perhaps this would have stopped the vicious circle of the forced liquefaction of assets at depressed prices.

    What was happening last week was banks were required to sell assets to meet reserve requirements as their credit rating fell. Booking these huge losses ("Marking to market") caused their ratings to fall more which then forced them to sell more assets... a death spiral that I believe some large hedge funds may have been using to futures and credit markets to accelerate for their own financial gain.... financial terrorism by our enemies at the worst and stock manipulation at best.

    ReplyDelete
  5. Capt. Kirk,
    Fried-man was a propagandist and NOT an economist. Right-wing nuts are perfect for Fried-man propaganda of "freedom." Americans are too doped to know the truth from the lie.

    Please be skeptical of economic theories.

    Jas

    ReplyDelete
  6. FW -- Re: Financial Meltdown; Who To Blame?

    Jas (original comment): “Only a total moron can be made to believe that Bernanke can avoid depression. Just the opposite, he has guaranteed a worse depression by allowing bad lending to go on so long. Please remember that depressions are caused by “bankers’ mischief.” Bernanke is a horrible "banker."”

    Lando: “Jas, that is the key of all this mess. We have not seem the rolling heads of this bastards. I want their heads! Why are prisons empty of bankers?”

    That is like beheading, or imprisoning, the king. That happens when the regime collapses, or juts about to collapse. Right now, bankers still rule. But, that will end when there is enough misery, brought about by bankers, during the Greater Depression. American econ-political system WILL collapse. The dirty deed by the bankers has been done and they can’t undo it.

    Jas

    PS: Only ignorant people like to be ruled by Crooks, as Americans and Indians, presently are; decent, or sensible, people like to be ruled by a king. Read your Old Testament, you Christian and Jewish dopes (Israelites demanded that God give them a king because they were smart enough to figure out that communistic “democracy” with an elite wasn’t going to work for them). Hindus, Jains and Sikhs would do well to read their religious texts. Yeah, yeah, you are too smart compared to the ancients. An American suffers from the arrogance of knowledge that he does not possess. The default for an “educated” American professional, including an economist and political “scientist,” in the areas of economics and politics is – ignoramus (the knowledge consists primarily of propaganda).

    PPS: Indian-born dopes exist in America to make American-born dopes look good in comparison. Their arrogance of knowledge is off the charts. One can be a great engineer, or a doctor, and yet be a bigger dope than an ordinary worker.

    ReplyDelete
  7. Jas.

    One warning.

    Leave ALL talk of race or nationality out of your posts if you want them posted here.

    Also, no more name calling. I had dinner with Milton Friedman's son David just as I've had a meal with you, set up by mutual friends who wanted to introduce us.

    I don't want either of your names childishly smeared or mocked here.

    ReplyDelete
  8. What recourse is there against the 'maroons' in Congress that were supposed to be watching?
    The executive can't investigate Congress, leaving them to investigate themselves. What chance?

    ReplyDelete

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