What Caused the Financial Crisis? Still 22 Possibilities

There are many secondary reasons why the collapse. The major reason is they created a product, sub prime, which this was all based on, that does not work.

I wish they would state this! No average American can afford a substantial increase in their home mortgage payment.
Mark S.Pash, CFP

“… people are just going to throw their hands up and decided there is no way to stop financial crisis, and move on.”

When the United State creates 99.9% of its money supply as the principal of loans, when those loans must be repaid with interest, when repaying those loans requires all of the money created, when no one created the money to pay the required interest, viewed as an aggregate whole, the terms of the loan contracts are impossible to fulfill and the banking system must fail.

Because the borrowers always owe the banking system more money than exists in the money supply, the banks must continually make new, larger loans, using the new money to service older loans, their actions increasing the total amount of debt. A growing pyramid of debt consumes an ever increasing amount of interest. Hiding this flaw requires ever larger loans, sometimes creating credit bubbles, eventually reaching a mathematical limit when loans simply cannot be created rapidly enough to support the scheme. When over extended banks stop lending, the collapse of the monetary system is inevitable and entirely predictable, occurring with such regularity that is called the normal business cycle.

The US money supply is about $50 trillion, the US government issuing about $40 billion as coins or about 0.08% of the supply, the Federal Reserve issuing about $1 trillion in paper currency or about 2%, the Federal Reserve notes created from the national debt, and the Banks issuing $49 trillion as check book money using fractional reserve lending procedures. With the exception of coins, the money supply is created as debt. If the interest rate is on the order of 6%, the total amount of money needed just to pay the interest this year is $3 trillion. In a debt based fractional-reserve-lending-system, a stable currency is not possible.

In our monetary system, Money is debt. If there is no debt, there is no money.

As the above poster said our current system of money is too blame, and when one couples that with talented people from MIT, Princeton etc… coming up with exotic synthetic financial “products” that exacerbates the problem ten-fold.

The whole system reeks of systemic risk because it over-leverages’ itself for short term gains; short term profit for risk based return has replaced sustainable albeit modest but still profitable gain. But, I guess when there’s implicit and explicit guarantees on debt “moral hazard” are always going to be inherent in the system.

Hopefully, with only a $8 million budget, the commission has managed to obtain at least one copy of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy” by Barry Ritholtz.

I would think that Barry could be persuaded to testify before the commission, gratis, on his list of those entities responsible, (see http://www.ritholtz.com/blog/2009/06/who-is-to-blame-1-25/) in his order:

1. Federal Reserve Chairman Alan Greenspan
2. The Federal Reserve (in its role of setting monetary policy)
3. Senator Phil Gramm
4-6. Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings (rating agencies)
7. The Securities and Exchange Commission (SEC)
8-9. Mortgage originators and lending banks
10. Congress
11. The Federal Reserve again (in its role as bank regulator)
12. Borrowers and home buyers
13-17. The five biggest Wall Street firms (Bear Stearns, Lehman Brothers, Merrill Lynch,Morgan Stanley, and Goldman Sachs) and their CEOs
18. President George W. Bush
19. President Bill Clinton
20. President Ronald Reagan
21-22. Treasury Secretary Henry Paulson
23-24. Treasury Secretaries Robert Rubin and Lawrence Summers
25. FOMC Chief Ben Bernanke
26. Mortgage brokers
27. Appraisers (the dishonest ones)
28. Collateralized debt obligation (CDO) managers (who produced the junk)
29. Institutional investors (pensions, insurance firms, banks, etc.) for buying the junk
30-31. Office of the Comptroller of the Currency (OCC); Office of Thrift Supervision (OTS)
32. State regulatory agencies
33. Structured investment vehicles (SIVs)/hedge funds for buying the junk

You are correct. All money is debt. The debt hawks don’t understand that for the economy to grow, it must produce a growing supply of debt. The safest, most controllable form of debt is federal debt. The federal government is the only debtor that can produce unlimited money to grow the economy and to pay its obligations.

When debt does not grow, even the smallest inflation reduces the amount of real money. Just to break even, the total amount of debt (money) must grow at least as much as inflation, population, balance of payments and the economic growth goal, combined.

Contrary to popular faith, the so called “fractional-reserve-lending-system” does not exist. Banks are not limited by their reserves, as lending actually creates reserves. Further, the federal government will lend banks all they want, to add to their reserves. A bank with zero deposits could lend millions. Banks are limited by capital requirements, not by reserves.

Rodger Malcolm Mitchell

Ask yourself this simple question: if we had transparency in all financial products, would we have gotten in this mess?

If sub prime borrowers had been honest and transparent about their worthiness to get loans.

If appraisers had been honest and transparent instead of over valuing property.

If the mortgage brokers had been honest and transparent in the terms of their loans, made sure borrowers understood the long term ramifications of loan payback.

If the people bundling CDO had painted a clear picture of what was in those traunches.

If the bond rating agencies had been honest and objective about ratings, instead of just pleasing the people paying for the ratings.

If the Wall Street firms selling CDO’s had told their buyers, yes we are recommending this to you, but at the same time we are buying naked CDS to make money if they fail.

If the federal regulators had done a thorough job of making all things clear.

If you give even the least sophisticated Americans full and complete information, they will make pretty good decisions. But when brokers, Wall Street people, and bond rating agencies can all make money by obscuring the truth, what do you expect to happen?

That’s absolutely correct, but that’s how Wall Street always has us over a barrel: asymmetric information. Market makers have great no HUGE informational advantage over “market takers.”

“Ask yourself this simple question: if we had transparency in all financial products, would we have gotten in this mess?”

Unequivocally YES!

Any fractional reserve monetary system is a fraud, a classic Ponzi Scheme using debt in place of investment.

1. The fractional reserve banking system creates all of our nation’s money as the principal of the loans.

2. The principal of the loans must be repaid in full, leaving no money to pay the required interest.

3. Therefore, the loan contracts are impossible to fulfill.

The difficulty can be seen when it is expressed as a mathematical inequality: the principal cannot equal the principal plus interest if the interest is greater than zero.

Because the borrowers always owe the banking system more money than exists in the money supply, the banks must continually make new, larger loans, using the new money to service older loans, their actions increasing the total amount of debt. A growing pyramid of debt consumes an ever increasing amount of interest. Hiding this flaw requires ever larger loans, sometimes creating credit bubbles, eventually reaching a mathematical limit when loans simply cannot be created rapidly enough to support the scheme. When over extended banks stop lending, the collapse of the monetary system is inevitable and entirely predictable, occurring with such regularity that is called the normal business cycle.

Because the borrowers always owe the banking system more money than exists in the money supply, the banks must continually make new, larger loans, using the new money to service older loans, their actions increasing the total amount of debt. A growing pyramid of debt consumes an ever increasing amount of interest. Hiding this flaw requires ever larger loans, sometimes creating credit bubbles, eventually reaching a mathematical limit when loans simply cannot be created rapidly enough to support the scheme. When over extended banks stop lending, the collapse of the monetary system is inevitable and entirely predictable, occurring with such regularity that is called the normal business cycle.

Because the fraction reserve system is inherently flawed, no amount of information, or transparency or regulation can make the principal of loans equal the principal plus the interest.

Restoring sovereign authority to the government, its issuing all of the nation’s money is the only way of this mess.

The main reason has been the wild and irrational consumerism based on the erroneous concept of perpetual growth of wealth.

I said this many times before. But apparently it is preparing to return to haunt us again. And again.

The commenters who describe how our monetary system “creates money” are correct that such a system is unstable and doomed- but it’s not supposed to be. The antique view is that loans are meant to supply capital for business enterprise. The enterprise generates profit from which the loan is repaid. The business activity represents growth of the economy which is reflected by growth in the monetary supply which is created by the loan.
Conclusion: Anyone who makes unsecured loans to someone to buy consumables or the necessities of life should have only one recourse in case of default- don’t loan to that person anymore. The same goes for any loan for the purpose of financial speculation without suitable (tangible) collateral.

I find this absolutely unbelievable. 8 million and they can’t figure out what went wrong?

All they have to do is read Mark Zandi’s book “Financial Shock”. Here’s the link to his website:

http://www.financialshock.com/

And please tell Mr Angelides to send me the change from the 8 mill. One quick tip when reading between the lines of the book, if you insert the word “greed” every 10 seconds or so, you’ll get a clearer picture.

Really, these Wallstreet people are very sharp and very knowledgeable about the way things work. There has to be regulation and oversight, or they’ll find another way to make a mess of things (while they get rich of course).

Hire one of the Wallstreet insiders to do it. They’ll recognize the crap when they see it.

Life is simple. We make it complicated. Go back to number one. Mark the CFP, you are so right. Our government, with the best of intensions, created an inferior financial product to make it possible for every American to own a home, whether he could afford one or not. Another sub factor was that government fees, environmental requirements and the additional carrying time it takes for builders has exploded, dramatically adding to the cost of building. These costs had to be passed on if you expect to stay in business. Under the circumstances, qualifying to buy a home with a mortgage with an under market interest rate was the only way the masses could afford to buy a home. However, it’s a time bomb and the equivalent of being in the futures market. Then for all of our financial institutions to use this collateral as reserves as if it was durable for the long term regardless of interest rate movement followed. Then the rest. You guys make it seem so complicated that I feel like the child who said the emperor is wearing no clothes. It’s so simple. The rest is academic dribble. If you want to fix the problem, go to the roots and reduce the size and scope of government adding to the cost of building a home and back to the gold standard of the 30 year fixed rate mortgage. That’s it! Done. There’s your multi-million dollar report. Send me the change because your economic policies ruined my real estate holdings you government SOBs. You know it’s you. Trying to blame it on private greed is just another excuse to embrace government expansion, and its dead weight, and the death of capitalism, which by the way, pays all your bills. Now you’re printing money, creating more BS for the future.

Yes, uncontrolled debt is a problem. But where Greenspan and Bernanke failed in ivory tower calculations was failing to understand and estimate the power of greed and corruption. Yes, our financial system is a Ponzi scheme, but what really makes things dangerous is a political system that is in the back pocket of the bankers, and will not change the status quo for the better because the politicians are also wanting to grease the corrupt system. The politicians need the money from the bankers to run their campaigns. And if the politicians loose their jobs they are still looking for friends to hire them or at least get a lobbying job working for the bankers. UNTIL TRUE CAMPAIGN FINANCE REFORM IS ENACTED NO CHANGE OF ANY QUALITY WILL OCCUR. Or at least it would help some. Until then we will keep getting phony flag wavers to lead this country. (Also, this 8 million dollar study is a joke.)

Absolutely correct!!! And to exacerbate the problem, that additional money supply creates artificial demand and inflation. One additional part of the equation is the imbalance between markets. It doesn’t take much to realize that the forces of supply and demand for certain markets, such as the financial, medical, and energy sectors are such that more money flows in than flows out. And, as it accumulates in these sectors, it is depleted in the rest. Eventually, the simply isn’t enough of those little contracts that account for individual work, we call money, to keep the economy running.

The causes of the financial crisis hs been definitively documented in the Joseph Stiglitz book, “Freefall.” The problem now is that new regulations should have been in place by now. No, just more delays and dallying in Congress. It’s a mess in Washington with no end to this farce.

The ones who need to be regulated are the regulators.

Just to clarify: It widely, though erroneously, is believed fractional reserve banking means banks keep a fraction of their deposits in reserve and lend out the rest. You even will find that definition in many economics books and in speeches by economists who should know better.

Banks do not lend a fraction of their deposits. A bank with zero deposits could lend billions. The government will lend banks all they want, to add to their reserves. Banks are not limited by deposits or reserves. They are limited only by capital requirements.

You hypothesize that because of interest, “A growing pyramid of debt consumes an ever increasing amount of interest,” which verges on truth, though your conclusion (“. . . eventually reaching a mathematical limit when loans simply cannot be created rapidly enough to support the scheme.”) is false.

There is no mathematical limit to debt (i.e. money) creation. If you believe there is such a limit, please tell specifically what it is.

I should remind you that in 1980, federal debt was $800 billion. Today it is $12 trillion. Continuing the same rate of growth, the debt would be $180 trillion in 2040, and still not reach any mathematical limit.

Rodger Malcolm Mitchell