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Hubris & the Financial Crisis Facing America

I just finished reading "Popes & Bankers: A cultural history of credit & debt, from Aristotle to AIG" by Jack Cashill. It is a very good book that I highly recommend. Below are some of quotes from it, which reveal a great deal about the origin of the financial crisis our nation (and the world) is now facing.



"On October 6, 1979, Paul Volcker announced that the money supply would no longer fluctuate with the business cycle. The Fed would fix the money supply and allow interest rates to float. Just three years nearly 25 percent of the nation’s four thousand Savings & Loans Associations had collapsed. [i]

On Wall Street bond traders raked in profits, because the Fed’s efforts to get the money supply under control helped turn credit into the world’s greatest growth industry. Between 1977 and 1985, the combined indebtedness of American governments, corporations, and consumers increased by an incredible factor of twenty.[ii]

The young guys coming out of grad school began to invent unholy new ways to subdivide the mortgage pie[iii] -- CMOs, CDOs & CDSs.[iv] The executives that ran the companies probably could not have explained what the new financial products were, but they couldn’t deny the profits they were bringing in.  

Between 1980 and 2000 outstanding consumer debt rose from $355 million to $1.6 trillion. More than 80 percent of consumer debt was tied up in home mortgages.[v] The big corporations were not concerned about the risks because they believed that the government would do what it always did when the big bankers got in trouble – “No matter what goes wrong, the Fed will rescue you by creating enough cheap money to buy you out of your troubles.”[vi]

Debt obligations would be packaged, insured, and sold without risk. This was not greed so much as hubris.[vii] It would have been good if someone had remembered Charles Morris’s general rule: “Only the smartest people can make catastrophic mistakes.”[viii]

Not a single one of the economists who weighed in on the subprime crisis mentioned the moral/cultural factors that contributed to it. Neither did Greenspan for that matter. There was nary a word about the erosion of religious restraints, the cultural embrace of credit, the breakdown in the family, the media support for profligates, the government imposition of race and gender quotas on lenders, the consequences of land restrictions, the political pressures to put people in homes, the overrepresentation of single women in housing defaults, the sanctioned waiving of documentation, and the easy purchase of Congressional support by financial institutions, especially the government-sponsored enterprises.[ix]

Bear Stearns’ Friedman gives a share of the blame to the investment banking houses . . . and a share to “FHA and HUD and all those people saying, `You better lend to those poor people.” “But, in truth,” says Friedman, “it was a team effort. We all **** up. Government. Rating agencies. Wall Street. Commercial banks. Regulators. Investors. Everybody.”[x]"

Interestingly, many of those working for the “team” personally made millions, some billions – and still have it. When we follow the histories of financial panics in America, amazingly we find the same trend. Don’t you think it’s about time to come up with a new plan?


[i] P. 174
[ii] P. 175
[iii] P. 179
[iv] P. 181
[v] P. 202
[vi] P. 212
[vii] P. 215
[viii] P. 226
[ix] P. 230
[x] P. 231

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