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Nicole Gelinas
Surveying the Wreckage « Back to Story

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You are right, that Congress actions has not prevented a similar crash in near future.

And you are clearly correct in "The answer lies in the United States government’s quarter-century-old policy toward the financial sector: to subsidize its growth at all costs. The delirious 1980s party on Wall Street lasted until 2008—and has even started up again—because a bailout-happy Washington hasn’t allowed finance to benefit from the market discipline of self-correction. "

But then your thinking and mine diverge...since I feel that it was the Reagan and subsequent deregulation..."1980's party" and governments never ending support of Wall Street. Wendy and Phill Gramm led the way to "subsidize at all cost" this system, by removing all the rules, allowing the larger banks to eat the smaller ones, and setting up conditions for the big bailouts.

You may not think of deregulation as a subsidy, but it really was for banks, who already have guarantees for small investors, giving them now, with no rules, the ability to leverage to the hilt with no fear of hurting anyone that could not afford it! Savings and loans first. Then the big mortgage banks, and of course the insurance giant AIG, all playing the Ponzi scheme that would not have been possible with old regulations. But that's just my opinion.
Your opinion on this point is the same as mines. I'm really glad of that because few people think same. cheap cialis
Goodness. Ms. Gelinas, you write astonishingly clearly. My tendency would be to make this note far too long, so, briefly, "Gush, gush, gush, gush!" Thank you, and I look forward to reading more of your work.
Key Question: What can an average American family do to protect its assets, savings and its very existence when the next financial crisis hits?
Excellent article. As a former bond guy, I would like to offer my insights as to how we got here.

I joined my grandfather's municipal bond house in 1969 right out of college. In those days the bond business was completely unregulated. I needed a state license to sell bonds and the test was a mimeographed true and false one that took less than an hour to complete. So where did I learn the rules? At my grandfather's feet, of course. He laid down the main rule to all of the other employees (although they did not sit at his feet): we don't sell junk. And he enforced it. I remember several occasions where he refused to allow a sale even where the investor knew all the risks and wanted to buy. There were two tests for junk: 1.) The obvious financial test: if there was any question -- any doubt at all -- whether the issuer was financially solid, it is junk. 2.) the indirect test: if you can't understand the bond, assume it is junk and then move on to something else. Almost all of the houses back then enforced these two rules. Those that did not were disparaged as 'junk bond dealers'. In other words, pimps.

A special note about bond ratings. My grandfather hated the rating agencies in his bones because they encouraged both dealers and investors to be lazy. He often told the story about a house that forbade its salesman to quote any bond rating. I can't remember the name of the house. Perhaps he made it up. But, either way, he was right in principle. We know that now. If I didn't distrust financial regulations as much as I do, I would suggest that Congress make a law that outlaws bond ratings.

It started in the early '70s, in our market here in the midwest when an enterprising bond salesman made a million dollars by just moving some paper around on the table. There was one or two of these guys in every local market at the time. This caught a lot of people's attention and by the '80s everyone was making big money by manipulating numbers instead of actually doing municipal financing. The old guard that enforced the rules retired or were pushed out and were replaced by quick money artists. Your article takes off from there to show how the methods of this new breed led to catastrophy.

The point I wanted to make is that before a certain point in time, the bond business was an honorable thing run by honorable people. But time turned almost all bond houses into junk bond houses.

Luke 20:22 "Is it lawful for us to give tribute to Ceasar, or not?" But he perceived their craftiness, and said to them "Show me a coin. Whose likeness and inscription has it?" They said "Ceasar's." He said to them, "Then render to Ceasar the things that are Ceasar's, and to God the things that are God's."
This passage is not only the inspiration for the separation of Church and State. It is also a reminder of the fusion between money and State. Markets do not exist in a vacuum. Their foundation is set by society and government.
Your premise is that big government is in no way an extension of big business. If thats not true then you could not write a better more perfect script ........for laughing all the way to the bank. Your breathless article then completely collapses.
Beautifully written Mr. Gelinas.
@Ethan Anthony
"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a 'dismal science.' But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance." -Murray Rothbard
The British went through several speculative and financial panics and collapses. Here is one example before Governments believed they owed salvation to financeers,— 'Goschen acted decisively in 1890 when Baring Brothers, one of the largest merchant-banking firms, seemed on the verge of collapse through over-speculation in Argentine securities. William Lidderdale, governor of the Bank of England, advised Goschen that, with time, Barings could become solvent; the government must, however, provide financial support. Goschen hesitated about pledging ‘the National credit to a private firm’ (Elliot, 2.171). Convinced that it was ‘absolutely necessary for la haute finance to find its own salvation’ Goschen pressured Lidderdale to set up a guarantee fund (ibid., 2.173). The chancellor of the exchequer agreed to share all losses with the bank for twenty-four hours. The response of the banking and financial community was massive, with the fund eventually reaching £18 million. Barings was reconstituted and soon repaid its debts.' Thomas J. Spinner, Jr., Oxford Dictionary of National Biography entry on George Joachim Goschen.

We would do well to look at lessons from the past in more detail— this might allow us to have historical examples to garner courage to let risk aversion and market corrections exert their own discipline on excessive speculation.
Thank you Ms. Gelinas, I never miss reading you and your article here is one of the best analysis of the root cause of our dismal economic picture. You have also indicated how to solve this problem, more Market FREEDOM! By all means we must force this government to change. Too big to fail will always be the Politicians excuse and we must not allow them and their ignorant Keynesian mouthpieces to try to shift the blame to individual free market choices. As with almost every problem it's roots are in unprincipled and power hungry, corrupt political leadership.
Interesting that in this review you omitted "This Time is Different" by Rogoff and Reinhart.

An excellent article. And now that I am better informed about what brought us to our current state, I am more fearful than ever that we are heading in the wrong direction and there is little I, or anyone else, can do to stop us from going over the cliff.
Congratulations to Nicole Gerlinas! This is a very well put together look back at what happened and why.
"The delirious 1980s party on Wall Street ...has even started up again...This policy has been particularly damaging because the financial industry underpins the rest of the economy."
Actually the reverse is true. Wall Street always has ridden on the back of lower class prosperity. The arrogance of the financial classes in thinking they could pauper the middle class and prosper is the real cause of the crisis.
First they robbed the middle class with high oil prices, then when that began to fail as the middle class faltered under $ 4.00 oil they drank the blood of the housing market killing the golden goose of lower class efforts to build and develop real estate.
Now there is no lower class economy except unemployment insurance and the desperation of the financial class to stop that reveals their true condition. Bad.
Until the balance of trade drain is plugged this nation will continue to fail to prosper as its lower classes also fail to prosper.
Good news is there are lots of us who are now deciding it is time to de-emphasize consumerism permanently and thus bring an end to the need for the financial class. Bye.
I have "The Wages of Destruction" by Adam Tooze in mind thinking about this article.
Specialists might ask themselves what it is exactly that Wall Street has been asked to arrange financing for?
The home debt bubble was not the aim but the means. What was the aim?
The housing sector was used to force feed the growth of the financial sector through increasing degrees of fraud. This was done to loot the US economy.
Rotating office holders from public office to private corporations simply wanted to enrich themselves?
There was no aim?
charles gasparino July 18, 2010 at 9:03 PM
did this author really suggest that i didnt hold govt accountable for the financial crisis?
The new finance/gov't oligarchy! Thanks for explaining to us how it's arising. Now, how to fight it? Please advise! Most of us don't know enough about all this -- educate us further.