|
I think this is an important essay from Michael Burry, excerpted
below, about the financial crisis, and so I share some extended excerpts with
a link to the original. Keep in mind that this is one perspective from a
particular point of view.
For a more comprehensive and balanced view of the causes and progress of the
financial crisis I highly recommend Econned, by Yves Smith. I have given copies of it to some of the older
children, to help them understand what has happened and what they will face
in the future.
With regard to the policy stalemate, there are obvious tradeoffs between
growth and taxes and spending cuts, and the ways and phases in which one
introduces them. Those fortunate few, who have one point of view about reform
and the distribution of losses, have a dominant voice in the mainstream
media. Others are beginning to speak up and show their disgust and
displeasure with the status quo.
As he points out the Greenspan decision to stimulate the economy with rates
cuts, and thereby fuel the housing bubble, keep in mind that at the same time
the Bush Administration was initiating two wars and providing tax cuts for
their wealthy constituents. It might be considered a perfect storm if it was
all accidental and coincidental. I personally think it was not.
But it does show what happens when one engages in massive stimulus after a
financial crisis, Y2K and the tech bubble, without also reforming the system
and prosecuting fraud. There was yet another asset bubble, further plunder
taken, and greater debts left to the public.
History may very well regard both The Patriot Act and TARP as key pieces of
legislation, pushed through hastily under the duress of a crisis,
that proved to undermine the stability and health of the Constitution
and the republic.
The intense lobbying and buying of political power that set the financial
bubble in motion in the 1990's under Clinton led by team Greenspan-Rubin-Summers
is still underway. Those who are sitting on large piles of loot obviously
wish to keep it, and shift the blame and the pain to others. It will be a
divisive time until this is resolved.
I doubt very much that the resolution will not include de facto defaults and
devaluation of currency. It is only a question of how targeted they might be
and who those targets are. Right now the middle class and the poor are 'not
winning.'
The author acknowledges the key problem we face today, and that is the
complete failure of the leaders of the system to acknowledge the problem and
take the appropriate actions, because they are deeply complicit in the
corruption and malfeasance that led to the crisis and a generational transfer
of wealth from the many to the few.
Vanderbilt Magazine
Missteps to Mayhem
By Michael Burry
"...Our global village underestimated many risks throughout the 1990s,
as is typical of a generally good economic time. As we faced 9/11, the stock
market crash of 2002, the Enron and WorldCom scandals and eventually war, the
Federal Reserve Board stepped in, cutting the discount rate it charged
lenders from 6 percent to roughly 1 percent in order to stave off recession.
Other key short-term interest rates followed.
Not coincidentally, from 2001 to 2003 we saw American home prices, which had
largely moved in line with household income through the decades, suddenly
accelerate up and away from the household-income trend line. Rapidly
declining short-term rates hit lows not seen since the aftermath of the Great
Depression, inducing a boom in adjustable-rate mortgages.
The homeowner’s dollar went further during that teaser-rate period, so
home prices rose unnaturally. Risk would be low as long as home-price
appreciation was strong under this paradigm, thanks to refinancing options.
It was a positive feedback loop with the full blessing of the U.S.
government. Amid early fears that the housing market was getting ahead of
itself in 2003, Federal Reserve Board Chairman Alan Greenspan assured
everyone that national bubbles in real estate simply do not happen.
I disagreed. As I surveyed the national trends in housing, I wondered whether
common sense ought to rule against the application of precedent to the
unprecedented. But Greenspan went on to advise in
2004 that new types of adjustable-rate mortgages were being underutilized. In
2005 he allowed technology used by subprime lenders to get subprime borrowers
into homes. Tragically for all of us, the Federal Reserve had authority to
block lending activity it deemed unworthy of such treatment, but it had no
will to do so...
By fall 2004, I noted for my investors that Countrywide Financial, a very
large national mortgage lender, was reporting subprime mortgage originations
up 158 percent year over year, despite a 24 percent decline in overall loan
originations. Evidence was manifest: Banks were chasing bad credit, inclusive
of housing speculators. The only question was how far they could go.
Ominously, fraud jumped. The point at which the
provision of credit was most lax, in my mind, would mark the point of maximal
price in the asset. I imagined the top end of the housing market would be
marked by a climate in which borrowers of subprime quality were enticed to
buy with teaser-rate monthly payments near zero. I was very aware lenders
would take this to the nth degree. Banks could sell loans they did not want
to keep through Wall Street, to investors who were ravenous for yield.
Importantly, because subprime mortgages were being turned into securities,
there were mandatory regulatory filings—and that’s how I educated
myself about the sector. At times I felt I was the only one reading these
filings.
By summer 2005 these documents revealed that interest-only mortgages had
taken a substantial share in the subprime market. Just a year or so after
they were introduced, more than 40 percent of subprime originations were
passing through Wall Street on their way to investors. This was up from 10
percent a year earlier. At the same time, second-lien mortgages ramped up
significantly. Stated income options available to borrowers inspired a new
vernacular: the “liar loan.” In some mortgage pools, 40 percent
of subprime loans were for second or vacation homes...
Incredibly, it would be reported later that more than $60 trillion in credit
derivatives were in effect at their peak. To use a bit of hyperbole: That is
roughly equal to the gross product of the entire world. How could that be?
Credit derivatives on an underlying asset could be worth multiple orders of
magnitude more than the asset itself because all asset-backed derivative
securities are settled in cash—pay as you go. That was the secret sauce
of the Doomsday Machine.
And so the crisis unfolded, with the market providing a signal far too late.
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson
continued to underestimate the situation. I was apoplectic.
Paulson now claims that even if he had known what was going to happen, he
couldn’t have done anything about it. He had just joined the U.S.
Treasury in the summer of 2006. But he came from the top job at
Goldman-Sachs, and once he was treasury secretary, he orchestrated government
takeovers of AIG, Fannie Mae and Freddie Mac—absolutely unthinkable
actions just a few years ago. Paulson was anything but an impotent tool, but
if he actually felt that way, it is a devastating commentary on how our
government works.
As books and articles about the crisis proliferate, it becomes clear that at
nearly every failed institution and every relevant department of government,
someone had insight every bit as good as mine, and in many cases better.
However, none of these people was in the top job. That our CEOs, our governors
and our chairmen did not see this coming, did not adequately prepare their
constituencies, is an indictment of the manner in which we choose and enable
our leaders...
I worry about the future of a nation that would refuse to acknowledge the
true causes of the crisis. A historic opportunity was lost. America instead
chose its poison as its cure, and the second “Greatest
Generation” would never be born.
Today I expect the U.S. government to attempt continuing an easy money policy
into the next presidential term—past the meat of the foreclosure
crisis, and past the corporate and public financing humps that are upcoming. Junk bonds, incredibly, again are at all-time
highs. Quantitative easing seems to be working for now. But this is an
invalid validation of what America is doing, a Pyrrhic gamble. As we continue
to debase our currency, Bernanke says he is not printing money. Yet I receive
an email every day from the Fed saying we just bought another $7 billion or
$8 billion in treasuries, monetizing the debt. The scope and breadth of
quantitative easing raise severe questions about the Treasury’s needs.
Government borrowing of money for the purpose of injecting cash into society,
bailing out banks, brokers and consumers, is an easy decision for a population
that has not yet learned that short-sighted easy strategies are the route to
long-term ruin. We never quite achieved the catharsis necessary to stoke a
deep reevaluation of our wants, needs and fears.
Importantly, the toxic twins—fiat currency and an activist
Fed—remain even more firmly entrenched with the financial reforms of
last year. The Federal Reserve, having acquired new powers of regulation, has
insisted that nothing in the field of economics or finance was of any help in
predicting the crisis—period, no more comments. It’s a worthless
conclusion that guarantees we’ll make the same mistake again and again.
We need better leaders, but frankly this isn’t going to happen. A
problem cannot be solved if it is never acknowledged.
Taxes need to be raised, spending needs to be cut, and loopholes need to be
shut if we are to have any hope of returning to a stable base. Home ownership
should not be a policy of the U.S. government. The banking system needs
substantial reform and bank breakups. Glass–Steagall
needs a second run in a strong form. And 22.5 million public workers have no
business unionizing against the taxpayer. The list of things that won’t
happen—but should happen—goes on and on.
By 2020, interest expense on our national debt could very well exceed $1
trillion. All personal income taxes collected in the U.S. in one year do not
total $1 trillion. Our country’s math is scary big, but even scarier is
that it simply doesn’t work...
Read the rest here.
|
|