Right, but since we live in a country of laws, you (or someone) needs to identify which people, what they did that, and how whatever they did was illegal or fraudulent.
Which is part of the problem. There wasn’t a whole lot of regulation around these financial instruments (mostly because no one understood them), so technically, they didn’t break any “rules”.
I’m not saying it didn’t work out in some sense, except that the people most responsible for the crisis learned a valuable lesson. Unfortunately, it was the wrong lesson.
I wouldn’t have bailed out individual mortgages. I’m talking about companies that, like your example, wouldn’t have been able to make payroll. The gov’t should have gone in and keep those companies running while the financial sector sorted itself out.
Just my point of view, even if I think it is unrealistic in the real world. It is like when the rolled out the H1N1 vaccine with insufficient testing. It worked out, and with people howling for the gov’t to do something it is very hard to do nothing. But I really think we would have been better off if the banks involved had been allowed to collapse.
Where were you when this happened? Because one bank failing caused a liquidity crisis, and the ensuing recession. Can you imagine what would have happened if more failed without the Fed doing anything? There would have been a depression for sure.
As for people not learning, I think you mean those in government who opposed regulation even after the crisis. Banks are never going to give up short term gain to avoid longer term consequences. Since the consequences are longer term any CEO who was cautious was not going to have a competitive company and would be out on his ear in no time.
That’s why regulation is important - to keep business from doing things for short term gain but with long term harm. This was true before the recession and is true today.
I have no doubt at all there would have been a deep recession or a depression. However, all we succeeded in doing is kicking the can down the road. All of the dysfunction is still there waiting to blow up again. The gov’t should have let the cancer at the heart of it all die, and focused on preserving the rest. Prop up the companies that were dependent on the banks but not the banks themselves.
And yes, there should have been a lot of regulation put into place. I (partially) blame the Occupy movement for that (obviously the rest is the fault of cowardly politicians). They had a real opportunity to protest for real financial change, if they could have just kept the message direct and simple. Instead they decided to allow the movement to be open. The crazies became the public voice of the movement. The movement extended their message well beyond financial reform, and so it failed.
And look, I’m a total hypocrite (ok maybe not total) because I’m predicting a financial meltdown, but I still have the bulk of my retirement savings in things like NASDAQ index funds. I’m not anywhere near clever enough to predict when the next meltdown will happen. I’m just going to hope it is either soon enough that I can buy stuff cheap, or late enough that I’ll have already pulled my money out of the market.
And yes I recognize that undoubtedly if nothing had been done there would have been swathes of people who would have had their retirement savings wiped out. I’m sympathetic to that, which is why I’ve said in the real world you kind of have to bail out the banks. But in a hypothetical world, I say let the banks die.
Hold on a minute. Take a 25 year old with a target retirement in 2060, their 401K is likely invested close to 90% in stock.
https://investor.vanguard.com/mutual-funds/profile/VTTSX
I’m sure Fidelity, T Rowe Price, etc. have a similar allocation.
Letting banks fail wouldn’t have helped anything. Where they screwed up is not using the opportunity to either break up the big banks or restoring the regulations that kept the financial system for so long - and making acceptance of these a requirement for the banks to get bailed out.
I agree with you. Since I’m already retired, I have a lot of my savings in stable income producing stock funds. I’m also selling some of the more volatile stuff to live on, I figure I can benefit from the suckers still buying in this market. The crash is taking longer than we thought - but it will happen.
No one, except someone on the brink of retirement, had to lose money in the crash. (Also assuming they had a job and didn’t need to sell their retirement funds to keep their houses.) I didn’t panic, and though I had large paper losses I kept buying and came out just fine. Dan Ariely used to say on Marketplace that the best financial strategy was to toss your investment statement unopened. Worked for me.
I admit I gave up some gains that I could have made lately for being more aggressive. But in the long run I think I come out ahead. And when I turn on Social Security and my annuity at 70, my dividends and interest should give me enough to live on without dipping into capital except for emergencies.
I read that as most American have small or no 401Ks. Definitely true about no single stock. My last employer didn’t even allow us to buy company stock in our 401K, an excellent rule.
A majority of Americans own stock, at least indirectly.
Depends on how you define majority. From the link.
A majority is > 50%. A majority of Americans own stocks. Full Stop. Saying otherwise is non-factual, at best.
I linked to a video recently (in a different thread I guess) which discussed fraudulent behavior at Lehman Brothers — to disguise their high leverage they did sham one-day transactions at the end of every month to appear in compliance. Fuld perjured himself abiout this and another matter when he testified to Congress. I’m sure there was much other fraud going on, fraud you can read about on-line.
But it is VERY hard to prosecute for financial frauds. For example, worse-comes-to-worst Fuld could always use the ignorance defense: “Despite my multi-million salary I really am a stupid cuck. If anyone ever discussed these frauds with me I hadn’t a clue what they were talking about.”
There were several prosecutions, but not of any big players.
@ BeepKillBeep — Perhaps you didn’t appreciate the approach I laid out. It’s hard to send the fraudsters to prison, but I would have hit them in the pocketbook. I would have kept the financial system intact but made the U.S. taxpayer a major stockholder. The taxpayers, not the billionaires who gambled with taxpayer money, would have reaped the financial benefit from recovery.
Having money in a 401k that invests in stocks is not owning those stocks in any meaningful way.
UIAM Boeing is currently about 0.66% of the S&P 500 by market cap.
You’ve managed to completely misunderstand the arguments against your position. Owning a little stock is not the same as owning a lot of stock. Full stop. Does your source show HOW MUCH stock those majority Americans own. Question mark?
Shutting down Boeing would have a large adverse effect on the U.S. economy — that much is correct. But your concern that the median U.S. citizen has a $17 stake in Boeing because of the index fund in his 401k is a peculiar perspective.
That certainly would have been better.
Here’s the thing though- although there may have been some criminal-ish stuff going on in the various companies, that stuff wasn’t the reason for the 2008 financial crisis.
Popular opinion is fairly ignorant about the financial world- there’s a mistaken notion that everything is done deliberately and that everyone knows what they’re doing with this stuff, and more importantly, understands all the consequences. So when everything goes sideways, the assumption is that the first three conditions are true, and then the deduction is that if everyone knows what they’re doing, and are doing things deliberately, then the ONLY way that everything can go sideways is if someone is doing something deliberately crooked and/or fraudulent to cause everything to go sideways.
This isn’t so. My understanding of the financial industry is that some parts are relatively well understood and well regulated, but a lot of the esoterica of the non-consumer financial world isn’t that well understood by anyone, including the major players, and that since there are so many players and so many interactions, that a lot of the consequences aren’t well understood either, so that stuff like 2008 can happen when nobody’s necessarily deliberately perpetrating a massive fraud.
Which is why the repeal of Glass-Steagall was a bad idea. It’s one thing for an investment bank to muck about in poorly understood things like derivatives, knowing that the bank can fail if they invest poorly. But when that bank is FDIC-insured, it allows the bank a certain level of freedom at the expense of the taxpayer.
Partly correct. Partly wrong.
There was certainly overlap between fraudulent Wall St. moves and the mounting risk and its aftermath. The frauds at Lehman are an easy demonstration of this — they certainly did use fraudulent subterfuge to hide their leverage ratio which was in violation of contract and/or law. After all, it was the huge amount of credit that had been extended to Lehman that was the proximate trigger for the entire crisis. And as is often the case, the cover-up might be worse, in the criminal courts! You might convict Fuld for perjury without making other charges stick.
And that’s just one man at one bank. Start another thread if you don’t think there are other Wall St. fraudsters from that epoch whose deeds went unpunished.
Rating agencies seeking higher revenue were issuing credit ratings they didn’t believe in. This aggravated the risks. I certainly think this was fraudulent; ask a lawyer whether it was criminal or civil fraud.
Sure; the general ignorance of the market was an underlying reason for disaster. But some of the ignorance was wilful. Many people understood that a housing bubble was in progress, likely to be burst. Yet rather than playing Cassandra, they profited from the bubble. Illegal or even immoral? Perhaps not. But the sanguine picture bump depicts is quite misleading.
I’m not saying there wasn’t fraud, but it wasn’t really the cause of the crisis, any more than a dozen other things.
I think it’s natural for people to think that everything’s perpetrated from the top, and that there’s ultimately SOMEONE responsible who was the cause of the problem. That’s not the case here. The reality is a lot more unclear, blurry and gray.
If you remember, Alan Greenspan said that he didn’t understand some of the products at the time.
The banks, having knowledge of the algorithms used by the bond rating agencies, structured things to include as much junk as possible and still get rated AAA. Not really fraud, but headed that way. Some of the problems were structural, such as the banks getting to choose the bond rating company that rated their bonds - definitely an incentive for the raters to play ball.
That’s why regulation is more important than prosecution, even if prosecution feels better to some people.
The ratings analysts knew, or should have known, that they were inflicting millions in expected losses on innocent investors. A motorist who accidentally kills 5 people will spend years in prison. What about a financial analyst who inflicts a loss of comparable magnitude knowingly? (in some societies he’d be sacrificed “pour éduquer les autres.”)
But that ratings crime may be very hard to prove or prosecute. Is a fraudster who knows prosecution is exceedingly unlikely committing a fraud? By definition, is he a criminal or not?
There’s a fuzzy line between greed and fraud; and the whole issue is complex and ambiguous — but do not underestimate the influence of greed and fraud on the disaster. Again: the crisis was first ignited by Lehman’s defaults: they’d illegally cooked their books to borrow as much as they did.
A problem with regulation is that it’s directed at yesterday’s scams. What about clever new chicaneries tomorrow?
That’s why the key to my proposed remedy was neither prosecution nor regulation. Forced recapitalization would have placed banks’ ownership into the hands of people committed to prudent and proper behavior. The malfeasants would learn a lesson via their financial losses. This attacks a key crux: Moral hazard.