Summary:
Mike Shedlock argues that the cause of the financial crisis is not lack of regulation, as argued by by Roubini et al., but government intervention in free markets and fractional reserve banking. Government promoted an ownership society mentality and established HUD, FHA, Fannie, Freddie, and hundreds of affordable housing programs. But government promotion of housing put an artificial bid on housing that a free market never would have, raising the price of housing. In addition, the simple reason Moody's, Fitch, and the S&P do such a miserably poor job is government sponsorship. If Moody's, Fitch, and the S&P had to survive based on how good their ratings were instead of a model where the SEC says they have to rate everything, the problem with rating agencies would be cleared up overnight. The Fed is part of the problem too. The creation of the Fed was a blatant intrusion on the free market in the first place, but the Greenspan Fed's allowance of sweeps was economically equivalent to reducing the reserve-requirement ratio to zero for banks with sweep programs. Ultimately, the problems can be blamed on fractional reserve lending and the ability to create money (credit really) at will by borrowing it into existence. (Published: 10/09/08)
Notes:
- Roubini correct about US becoming United Socialist State Republic of America
- but: wrong about what went wrong and who is to blame
- e.g. the "fanatically and ideologically zealot free-market laissez-fair administration"
- e.g. "ideologue regulators who literally held a chain saw at a public event to smash unnecessary regulations"
- true cause: government meddling in the free markets
- there does not need to be regulation of Fannie Mae or Freddie Mac because neither should have existed in the first place
- it was government meddling in the free markets that created Fannie and Freddie
- government meddling in the free market will always blow up
- no matter how many government regulators one threw at Fannie or Freddie, both were going to blow up sooner or later
- ownership society mentality
- the HUD, FHA, Fannie, Freddie, and hundreds of affordable housing programs all came out of "ownership society" type thinking
- sponsorship of such entities creates a problem that regulators can never get right
- the bureaucratic mission inevitably takes on a life of its own
- government promotion of housing put an artificial bid on housing that a free market never would have
- that artificial bid had the exact opposite effect of what was intended
- every government sponsored affordable housing program raised the price of housing
- regulation could not fix that basic flaw and eventually the model blew up with ever increasing efforts to keep the ponzi scheme operative
- Ponzi schemes always blow up as soon as but not before the pool of greater fools runs out
- solution to all the above problems is simple
- eliminate government sponsorship of housing
- i.e. abolish the FHA, the HUD, Fannie Mae, Freddie Mac, Ginnie Mae, and every silly program on the books to create affordable housing
- government sponsorship of rating agencies
- many blame lack of regulation for the incredible fiasco at the rating agencies
- the simple reason Moody's, Fitch, and the S&P do such a miserably poor job is government sponsorship
- solution is easy: End government (SEC) sponsorship of the big three
- far past Time To Break Up The Credit Rating Cartel
- if Moody's, Fitch, and the S&P had to survive based on how good their ratings were instead of a model where the SEC says they have to rate everything, the problem with rating agencies would be cleared up overnight
- no amount of regulation can possibly cure flaws that arise out of government sponsorship
- Fed is the problem
- creation of the Fed was a blatant intrusion on the free market
- Greenspan Fed, ever wanting to "help" banks make more profits, instituted a policy of sweeps
- note on sweeps
- retail deposit sweep programs increase bank earnings by reducing the amount of noninterest bearing deposits that banks hold at Federal Reserve banks
- a bank's transaction deposits beyond approximately the first $50 million are subject to a 10 percent reserve requirement ratio, which is satisfied by holding vault cash or noninterest-bearing deposits at Federal Reserve banks
- in contrast, savings deposits are subject to a zero percent ratio.
- retail deposit sweep programs take advantage of this difference by "sweeping" transaction deposits into savings deposits
- that is, relabeling transaction deposits as savings deposits for reserve-requirement purposes.
- this is economically equivalent to reducing the reserve-requirement ratio to zero for banks with sweep programs
- effectively, the end of binding statutory reserve requirements
- every penny has been swept out and lent out (10 times over) thanks to the Greenspan Fed and fractional reserve lending
- what cannot be paid back will be defaulted on
- securitization problems
- in a free market with a sound currency, the originate to securitize model, aided and abetted by the rating agencies, would never have occurred in the first place
- None of the problems can be blamed on "free-market laissez-faire policies"
- every one of them can be blamed on fractional reserve lending and the ability to create money (credit really) at will by borrowing it into existence
