fool me once...

It is no secret that our country is facing serious economic challenges. One of the biggest challenges has to do with the bank bailouts. I have never been a fan of the bank bailouts. I think they should have been handled differently. (You can see my article titled “Bail THIS” written Friday December 12, 2008 to see what I think).

The thing I have been most upset with is that the people who got us into this mess are the ones being trusted to get us out. Some have argued that they are the ones who know the most and are the most qualified to fix this system. Some would say that these men are extremely motivated to fix things. I still think we should not allow people who blew TRILLIONS of dollars to be put into a position to do it again. This is just really flawed logic to me. Many people in these positions have made the argument that this crisis was unforeseeable; no one could have seen this coming and they are thus not responsible. I completely reject this argument because there were plenty of people who saw this coming. And, the people who saw this coming should be the ones we look to when forming a plan for getting out of this mess.

Here is a list of people who saw this mess coming.

Byron Dorgan

One of the things that intensified the great depression was the failing of thousands of banks. Banking as an institution failed, and people lost all confidence in the banking system. When FDR took office, he tried to put a system in place that would prevent this from happening in the future. One of his solutions was to separate commercial banks from investment banks. A commercial bank is a bank that most of us are familiar with in our everyday lives. These are the banks that have checking and savings accounts and loan money for things like houses and cars. An investment bank is a bank that raises capital for the purpose of investing. It does this by issuing and selling securities and other more exotic things like credit default swaps and junk I don’t understand. This system is to ensure that the banks responsible for keeping people’s money are separate from the banks that make money by taking the risks that come with investment. The legislation responsible for this was the Glass-Steagall Act. It was passed in 1933. It stayed in place until 1999.

In 1999 all the people who wanted less government got their way and the Glass-Steagall act was repealed. Although this was a Republican controlled congress, and this bill was conceived by three Republicans (Graham, Leach and Bliley), this bill was signed into law by Bill Clinton. The repeal of this act means that the government would stay out of the way of big business and let banks organize themselves the way that they want. Banks would now be free to make things more convenient and more marketable without government interference. The final version of this bill was passed 90-8 in the senate. Most would argue that this was a bipartisan effort. One of the senators that opposed this vote was Byron Dorgan. He realized the conflict of interests in commercial and investment banking could be catastrophic. He said “this bill will in my judgment raise the likelihood of future tax payer bailouts.” He also said “I think we will look back on 10 years time and say we should not have done this, but we did because we forgot the lessons of the past and that which was true in the 1930’s was true in 2010”. Here are clips from his senate speech in 1999 TEN YEARS BEFORE IT HIT THE FAN!

http://video.google.com/videosearch?hl=en&source=hp&q=byron%20dorgan&um=1&ie=UTF-8&sa=N&tab=wv#


Eliot Spitzer

Eliot Spitzer was the governor of New York from January 2007 till March 2008. He left the governorship in disgrace after having really kinky overpriced sex with a bunch of call girls in a scandalous prostitution ring. What was he doing before he got caught with high priced hookers? PROSECUTING AIG!!!!!!! That is right, when Eliot Spitzer was the state attorney general of New York in the late 90s, he made his reputation by prosecuting white color crime. In 2004, Eliot Spitzer brought a fraud case against AIG. He charged that AIG was developing financial machinery that was being used for deception. He stated that "these were transactions created for the purpose of deceiving the market”. He saw AIG as being the center of a system that needed tighter regulation. He also recognized the conflict of interest at AIG. The current system incentivizes short term risk taking. He actually won this case and AIG paid a settlement. Some could argue that Spitzer tried to ruin AIG to make a political name for himself. I say he realized that it was too big to fail and tried to bust it up, but Tim Geitner and the New York fed wouldn’t let him.

Mable Yoo (pseudonym)

Investments get rated by certain firms. Moody’s, Standards and Poor, and Fitch are the most notable ones. These companies rate things based on how safe an investment is. A rating of AAA is an investment that the rating system deems very safe. The idea is that if you invest in a AAA asset you may not make a ton of money, but you probably will not loose. AAA assets are considered the safest of investments. Two problems occurred that made this rating system less reliable.

In the housing market the mortgages people get are rated by taking into account the reliability of the person being loaned the money, the market, the house, the amount of the mortgage and a whole bunch of other factors. All these factors are plugged into some crazy equation and you get a rating. The problem was that when people with bad credit histories were given loans there was no past history to judge how good or bad these loans were. There was no historical evidence to indicate the likelihood these loans would be paid back. There were unknown variables in the equations being used to compute these ratings. Also, these mortgages were bundled together as one asset. The logic seems sound. Maybe a few people will default, but if they are bundled with people who pay on time then the overall asset makes money. The problem was even though the data was inconclusive, these bundled mortgages were STILL GIVEN TRIPLE A RATINGS!!!! Mable Yoo was an analyst at an unspecified investment firm. She looked at these assets and asked the question, “How can these be AAA assets when so many factors were unknown?” She was told by her boss to go home, get some sleep, not to worry, and cash her paycheck.

Nassim Nicholas Taleb

Nassim Taleb is a financial analyst from Lebanon. He did his grad work at the University of Penn. In his book “The Black Swan” he argues that there are certain events that are catastrophic and unpredictable. We make rules based on what we perceive, but we do not take into account the things we don’t know. We look for things to prove our point, not for things that disprove our point. It is a very interesting theoretical read. The point is that he predicted the housing crisis before it happened. He not only made some vague prediction, but put his money where his mouth was and made a fortune in derivatives and credit default swaps.


THESE ARE THE PEOPLE TO WHOM WE SHOULD LISTEN TO GET OUT OF THIS MESS. I am not gonna say I saw it coming since I didn’t have a blog so there is nothing on the record. But if you read The Elephant and The Dragon by Robyn Meredith (which I did) you would have been alerted to the difference in the savings rates between America and China. If you would have looked at the housing markets (which I did because I had quite a few friends flippin’ houses) you would have concluded that when the cost of living rises faster then the average wage that one of those numbers has to move drastically. If you looked at the Bureau of Labor and Statistics website (which I did) you would see that while unemployment remained steady, underemployment was out of control. I had to listen to Hannity and Glen Beck and all these PINHEADS tell me that I was a paranoid liberal and that everything was wonderful in the George Bush economy. I had to listen for 20 years that if the rich get richer it will trickle down to the rest of us. Some of these goobers didn’t even admit we were in a recession till after the presidential election. I admit I am not as smart as I think I am. I do think that there are very smart, insightful people who saw this coming. THESE are the people we should be asking “what do we do next?” I disagree with the idea that the people who broke the system are the only ones who can fix it. To quote George Bush “fool me once shame on you …YA CANT GET FOOLED AGAIN!!!”