Cross-posted from caucus99percent.com
I wrote a diary late last year about the financial crisis of 2008: An understandable explanation for the stock market crash (that Dems are not supposed to talk about) (352 rec’s)
The stock market crash of 2008 basically ruined my life (think "eat cat food in old age"), and I've been driven to understand why it happened, do you know what I mean? It’s actually taken me a few years to figure out WTF was even happening to me. I once was a highly skilled software engineer (Java, databases, yada yada), who decided to take a personally financed sabbatical because things were going so swell. And then the stock market crashed! Woo-hoo! It was great.
I left out a part about leaving my company: I was burned out from work and also from worrying about multiple rounds of layoffs. I thought I had been given a golden ticket to start a new chapter in my life, and decided to “trust the universe”. Little did I know that the universe was in a bit of a prankish mood, lol.
Quick Summary: the economic meltdown was not the fault of evil poor people who had been taking out mortgages that they could not afford. No, the meltdown was caused by a financial industry that was creatively coming up with a great new way FOR THEM to make money. One of their great ideas was to invent something called the “No Income No Asset” loan, or NINA. TAL’s Alex Blumberg says: “People in the industry called it a liar's loan. They expected people to lie.” Think about that for a minute. Then think about it again.
So it was lovely for me to see that the awesome Matt Taibbi has just come out with a new article in Rolling Stone: Why the Banks Should Be Broken Up
Paul Krugman wrote an op-ed in the New York Times today called "Sanders Over the Edge." He's been doing a lot of shovel work for the Hillary Clinton campaign lately, which is his right of course. The piece eventually devolves into a criticism of the character of Bernie Sanders, but it's his take on the causes of the '08 crash that really raises an eyebrow.
By way of making a criticism of the oft-repeated Sanders charge that the big banks need to be broken up, Krugman argues that banks were not "at the heart of the crisis."
This is Krugman's assessment of who was responsible:
"Predatory lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial; the crisis itself was centered not on big banks but on 'shadow banks' like Lehman Brothers that weren't necessarily that big."
Forget about the Sanders-Clinton race, because it's irrelevant to the issue. Krugman is just wrong about this.
Let me make an analogy to make things more clear, using language that anyone who watches crime drama on TV should recognize. When it comes to selling drugs, we know of two key roles, right? The “small-fry” dealer who sells the stuff to the kids in the neighborhood, and the “king-pin” who makes the real money. The dealer is the most obvious “bad guy”, right?, he is easy to spot. But who do the cops always want to go after? The king-pin. The cops know it is actually the king-pin who is most responsible for the problem. Taking out a dealer is flashy and feels good, but in very little time the king-pin will simply find another one to put out on the street.
Krugman is essentially making the argument that the “small-fry” dealers bear most of the blame for 2008. And the language of “shadow banking’ has been introduced to muddy the waters, because who the fuck even knows what those words mean? But Taibbi points out that the king-pins absolutely played a CRITICAL ROLE in the financial crisis.
Those loans in turn were bought up by giant financial companies on Wall Street, who chopped them up into a kind of mortgage hamburger. Out of this hamburger, they made securities. These securities were then sold to institutional investors like pension funds, unions, insurance companies and hedge funds.
And in that little paragraph lies the proof that Glass-Steagall absolutely did play a huge fucking role in the crisis. Once upon a time (from 1933 to 1999, actually) there was a wall of separation between boring old commercial banking (such as mortgages) and the more lucrative and exciting investment business. The nature of the game being played in 2008 was to take boring old mortgages and “chop[] them up into a kind of mortgage hamburger” [OMG, that phrase is so perfect] and sold as investments. Glass-Steagall’s pesky old wall would have prevented that; without this slicing and dicing and repackaging, there would not have been any “product” to sell to investors or motivation to sell loans to those who were not financially able to pay them.
As it turns out there was a huge demand for ‘risky investments’ because return-crazed investors were so focused on ROI that they had forgotten what the word ‘risk’ even meant. The banks were motivated to meet that demand, as all good capitalists are prone to do. They met it through products like liar’s loans, which they were willing to grant to anyone who had a pulse. Why? Because everyone involved made money regardless of the mortgagee’s ability to pay: the small-fry made money when they sold their loan “product” to unwitting folks striving after the American dream; the big banks made money by selling their “hamburger” to innocents who didn’t comprehend they were actually buying horse-meat, because it was rated AAA by the ratings agencies. Capiche?
Krugman should watch a little more CSI. Any fool knows that going after the small-fry doesn’t solve squat — you have to bring down the king-pins. And that's exactly what Bernie Sanders and Elizabeth Warren are trying to do. UPDATE: Uh oh. Cenk Uyger is also a little peeved at Krugman. He has a word or two to explain the many ways why Krugman gets it wrong. https://www.youtube.com/watch?v=YEcD6At9Ytk x YouTube Video Published on Apr 8, 2016Paul Krugman has a new article in the New York Times called “Sanders Over The Edge.” He's been bashing Bernie for months, but now he's truly jumped the shark. Cenk Uygur, host of The Young Turks, breaks it down. Tell us what you think in the comment section below. "Many analysts concluded years ago that the answers to both questions were no. Predatory lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial; the crisis itself was centered not on big banks but on “shadow banks” like Lehman Brothers that weren’t necessarily that big. And the financial reform that President Obama signed in 2010 made a real effort to address these problems. It could and should be made stronger, but pounding the table about big banks misses the point. Yet going on about big banks is pretty much all Mr. Sanders has done. On the rare occasions on which he was asked for more detail, he didn’t seem to have anything more to offer. And this absence of substance beyond the slogans seems to be true of his positions across the board.”*
Read more here (or don’t): http://www.nytimes.com/2016/04/08/opinion/sanders-over-the-edge.html?_r=0