Understanding the US Financial Crisis, Why Banking Regulations are a Temporary Fix

Part #3 of Understanding Capitalism and Socialism
by Joaquin

With the great financial crisis of 2007-2010 all over except for the screaming and yelling; and the yelling and screaming is over because oil spilled all over it; and with the oil spill all over because someone parked a SUV with toy timers on it in Manhattan; it’s time to understand how the financial crisis was solved; so let’s get started. By the way, aren’t we all glad the financial crisis is over? Well except in Greece and maybe Spain, Ireland, Portugal, Italy and the UK; don’t forget California and other bankrupt states, counties, municipalities, and your parent’s pension; not to mention a giant national debt that is ballooning out of control; but yeah otherwise the financial crisis is over. How do we know its over? Well, just turn on the financial news anywhere and you will hear that the recovery is in full swing except for people having jobs and buying houses. The crisis is so over that it has been over and over. I mean if you Google “housing market has bottomed” you can find out that the housing market has bottomed out constantly since 2006.

What happened to cause this crisis? Here is an interesting quote from the former Chairman of the Federal Reserve:

“Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity — myself especially — are in a state of shocked disbelief.” – Alan Greenspan

Mr. Greenspan is telling us something very important about the cause of the crisis. All the time I thought it was just people but It was the institutions! Thank you Alan Greenspan! Yes, the banks went crazy. Sure the people who worked there tried but couldn’t stop it. We can kind of imagine what that was like:

Institution: “Give up your integrity, take these suckers for all they’ve got and you will get a bonus”
CEO: (on knees crying) “No please I don’t want to, don’t make me”
Institution: “Do it and I’ll give you 53 million dollars; don’t and I’ll move to London”
CEO: “OK, OK, but that’s it no more … don’t push me man!”

Mr. Greenspan is saying this because he believes in Objectivism. He got that belief from a famous friend and author, Ayn Rand. Objectivism states that people won’t do anything brilliant unless they can do it for themselves; she wrote that rational self-interest is the principle and the individual “must exist for his own sake”. Now we see that the institutions were just trying to help the executives learn rational self-interest. Maybe these institutions read Atlas-Shrugged:

Institution: “Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to become the means by which men deal with one another, then men become the tools of other men. Blood, whips and guns–or dollars. Take your choice–there is no other.”
CEO: “Yes, but I feel it is wrong somehow”
Institution: “Guilt is a rope that wears thin”

I always think about the best teachers I had in school; didn’t they read Fountainhead? WTF, what a bunch of chumps; they are not thinking of themselves; they could be earning a mint somewhere else. Becoming a brilliant teacher because you want to help someone else succeed? Loonies!

Of course Objectivism says nothing directly about the fact that some people will steal you blind if you give them half a chance but it does seem to imply it by saying that brilliance requires narcissism. Here’s an important quote from Ayn Rand:

“the concept of man as a heroic being, with his own happiness as the moral purpose of his life, with productive achievement as his noblest activity, and reason as his only absolute.” – Ayn Rand

Well, we can certainly see this principle at work on Wall Street. The chairman of Goldman Sachs, Lloyd Blankfein said “I am doing God’s work”. Wow, it doesn’t get any nobler than that! Lloyd earned $53 million plus in bonuses in 2006 making him a truly “heroic being”. Goldman’s employees and their relatives did noble activity by contributing a million dollars to Obama’s presidential campaign.

By the way, those of us who believe in Objectivism should make sure to tell our children about it so they understand the great and noble heroic loving parents that we truly are.

Here is an interesting thing that Lloyd Blankfein told congress. He said that Goldman Sachs had no moral or legal obligation to inform its clients it was betting against the products which they were buying from Goldman Sachs because it was not acting in a fiduciary role. What does not acting in a fiduciary role mean? It reminds me of an experience I had as a child. Back in the late 1950’s my Dad took me to the only 24 hour pharmacy in San Jose which happened to be downtown. It was 1:00 AM and my mom was very sick and couldn’t look after me so my Dad took me along to get her prescription. There was a policeman standing at the pharmacy’s door and there were two all night counters. My Dad said that one counter was for picking up prescriptions and the other to place illegal bets. “See that policeman”, he said, “the policeman makes sure everyone stays calm when they loose”. The thing that threw me though was that everyone in San Jose knew about this place; the mayor, the police, the judges, everyone knew about the two counters. After hearing Blankfein talk to congress I kind of think the pharmacy wasn’t acting in a fiduciary role either and the policeman was not acting in a law enforcement role and Congress was like everyone in San Jose who knew about the two counters and pretended they weren’t there. “Not acting in a fiduciary role”; integrity – doing it wrong.

How did these institutions start working against their own self interest? Its kind of like back in the 1980’s when Ronald Reagan’s administration deregulated Savings and Loans giving them the capabilities of commercial banks without the regulations of commercial banks causing 760 savings and loans to fail costing the taxpayers over $124 billion dollars. Obviously the saving and loans “institutions” started getting all uppity with themselves and forced, yes forced people like Neil Bush, president of the failing Silverado Savings and Loan, to give himself and his business partners $100 million in illegal loans because they were not acting in their fiduciary role. We showed those institutions because in retaliation the people voted Neil’s dad to become president of the U.S. and paid $1.3 billion in our tax money to repair the damage done by Neil and his buddies. We showed those institutions that they can’t just push us around.

This latest financial crisis came from the U.S. government giving investment banks the capabilities of commercial banks without the regulations of commercial banks causing the entire world’s financial system to freeze up like Mom’s leftover casserole. When are those institutions going to learn that they can’t push people like poor Lloyd Blanfein around? Make him take all kinds of bonuses and give up his integrity? It cost $2.4 trillion this time around just to stop the collapse; the politicians haven’t gotten around to setting things straight yet. See, there’s an argument going on over whether anything really needs to be changed to prevent another financial crisis versus those who think maybe some financial regulations might be a good idea like what was done at the end of the Great Depression.

Speaking of the Great Depression, back in 2001, my mom was dusting behind the TV and found that Dad had stashed $30 thousand in cash there. We all laughed about it at the time but it should have been a warning. You see my Dad was eight years old in 1929 at the start of the Depression and he was 25 in 1947 when the depression finally ended. The people who lived through and were most affected by the depression are the only true banking crisis experts. As a banking crisis expert, Dad knew some important things; he knew that that the Great Depression would not be the last banking crisis. Dad put cash behind the TV because he knew that banking crises happen in a cycle. This brings up the most important point you need to know about the end of this and every financial crisis; it marks the beginning of the countdown to the next crisis. That’s because people forget, a new generation is in charge, regulations get repealed – institutions get all uppity and do crazy things.

Now why would politicians repeal banking regulations set up after a banking catastrophe? What do today’s politicians know that the old school politicians didn’t know? I used to have these arguments with my Dad. He would say that politicians and bankers are crooks. I would argue, “come on Dad, not EVERY politician and EVERY banker is a crook, some maybe”. “Nope” he would say, “they are crooks”. I see his point. It doesn’t really matter how many politicians and bankers are actual crooks because until we fix our government and the influence of corporate money, trying to count crooks is pointless and we can expect yet another crisis; just wait and be patient.

Here’s a question that I have. Knowing what we know now about how Goldman Sach’s and the other investment banks trade equities and bonds, when should I invest my IRA, my life savings? Should I just keep loaning it to the banks at zero interest in an insured money market account for yet another decade? Why would anyone in their right mind want to participate in any of these markets? Why would anyone buy real estate? How much cash can I hide behind my TV? This brings up a conundrum, the flat-screen TV in my bedroom has no space behind it for hidden cash.



Part #2 Understanding Supply Side Capitalism
Part #1 Understanding Capitalism versus Socialism

2 responses to “Understanding the US Financial Crisis, Why Banking Regulations are a Temporary Fix

  1. i learned a lot from this, thank you.

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