Economic Meltdowns and their affects

I haven't commented on the financial meltdown of the last few weeks .....

Foreclosures Rise During Recessions

..... mainly because there are thousands of blogger's who will do so, from the professional, to the amateur economists and political commentators, and each will have their own take on events:

• Those on the Left are pointing to Marxian economic theory, and saying the collapse of western capitalism is historically inherent in the model.
• Those on the right are more subdued, but say the model is robust enough to recover (although admittedly not without great pain and subsidy).

 

But all are agreed that the 'deregulation's' of the Banking and Investment sectors of the 1980's and 1990's were wrong, (Particularly the repeal of the US *Glass-Steagall Act in the 1980's & 90's) and allowed the lenders (for mortgages mainly), to over expose their risks, until someone panicked and called in some of the debt risk, thus causing the whole sector to collapse.

Good old fashoned Greed took over as it has in the past.

This was made worse by the practise of Short Selling - another clever money making mechanism, which essentially makes money by selling stocks, in the expectation that they will continue to drop in value, and you buy them back at the lower price, thus making a profit. This practise helped push many basically sound banks to the edge, as it caused panic selling by some institutions and private investors (triggered by one or more investor groups selling the stocks 'short').

Shorting on many financial products has been suspended in the major exchanges during the current crisis, but this means huge numbers of investors who took this position, are now standing to make considerable losses, which in itself could cause another crisis .... Ce la vie!

Anyway, enough on this, I don't want to talk about the crisis as such, except to note that in fact "Wall Street" i.e. the Banks and Investment houses, have actually collapsed a number of times in the past ..... its not a new phenomena. Surprisingly the Capitalist model has had to be rescued by the US Government on many occasions.

Here are the other occasions when the US Treasury has had to step in and stop a collapse:

In 1913, the Federal Reserve System was set up in direct response to a series of Panics or Depressions from 1873, and then in 1893 and finally the Panic of 1907 (where the collapse of the Knickerbocker Trust Company, New York's third largest trust company spread throughout the financial sector). This last crisis had many banks fail because of a lack of liquidity (money being lent) and lender of last resort facilities hence the US Govt intervention in creating the Federal Reserve System.

In the 1930's, Pres. Herbert Hoover created the Reconstruction Finance Corporation (RFC) to give $2 billion in aid to state and local governments as well as making loans to banks, railroads, farm mortgage associations, and other businesses. This was the vehicle that President Roosevelt used to make further payments to bail out banks again as a part of the "New Deal". Between 1932 and 1945 it made loans of $33 bn ($1.2 trillion in today's values).

In 1989, the US had to take on the debts of many South American countries who had issued "US Dollar Bonds" then defaulted on them - these were mainly held by US banks who now had no assets, and this threatened US dollar stability, so the US Treasury Secretary Nicholas Brady created new US Govt backed bonds to replace those worthless South American ones that the Banks held. These 'Brady Bonds' meant the US govt took all the risk on the bad South American debts - any cost not known.

During the 1980's the deregulation of the US "S&L's" (Mutual Savings & Loans Societies - akin in the UK to 'Building Societies'), led to multiple frauds across the sector, and they all went 'bust' in one spectacular period. The US Government had to form the "Resolution Trust Corporation" in 1989 to effectively restructure the debts of 747 S&L's - Cost to US taxpayer $125bn.

Now the Credit Crunch of 2006, and its deepening impact via the Subprime Mortgage Crisis of 2008, have led to massive US Federal interventions to bail out some Banks, Insurance Companies and take over bad debts whilst letting others go to the wall.

But as I have illustrated, this happens quite frequently in the US - Western Capitalism often means in practise that all the benefit and bonuses go to shareholders and employees during the good times, and the taxpayer has to foot the bill during the bad times ..... I should have got into Investment Banking!