Alan Greenspan Quotes

Credit default swaps were in large part responsible for the melt down of the economy of 2008 and the Great Recession thereafter. A credit default swap was one of the favorite derivatives that became popular. Is an insurance policy that a company will pay off its bonds and not go bankrupt. It is a cross between an insurance mechanism and a stock exchange type security mechanism, and through heavy lobbying, escaped any kind of regulation. It cost a company no money to write a credit default swap, and they were paid to do so. As long as business and the economy was good, it was a terrific business but there was no way of ever knowing how much risk they were taking. So companies who wrote credit default swaps did not have to have the money to pay to back them up. When that happened in 2008, even the largest insurance company in the world collapsed because of the risk of having to pay the credit default swap and the U. S. Government had to take over the insurance company. In 2010, the Obama administration passed a financial reform bill that began to regulate credit default swaps. Buffet, the American who had made the most money in financial securities, realized the great danger not only to the company, but to the entire national economy. Most of the rest of the financial institutions, could make large amounts of money without have to have much capital as long as things went well. So credit default swaps began to exceed the other financial instruments in activity. Neither the Federal Reserve or the other government regulatory agencies chose to regulate these risky instruments nor even to require that they be publicly disclosed -- See {637987}, {637986} and {637992}.

Sovereign credit substitution is where the government, one way or another, assumes and guarantees the debts of private corporations. This is an elegant way of saying: “taxpayer bailouts”

Despite this warning, and the hundreds of billions of dollars of people’s money that was lost on derivatives, and recommendations for not allowing derivatives to bought or sold by institutions who invest the public’s money, derivatives were not outlawed by Congress in its efforts to reregulate the financial industry.

The Meltdown of 2008 came a year later and Citigroup, one of the largest banks in America, had massive liquidity problems and in order to stave off bankruptcy the taxpayers had to come up with $45 Billion. The bank executives, as this quotation demonstrates, knew that they were in a very risky situation and that if the subprime mortgages started to default, the “music would stop” and they and the other banks would have a massive liquidity problem. None the less, they kept on investing more and more of their bank customer’s money and making money in what they knew was a highly risky enterprise. The greed clouded their judgment and when the music stopped and many were no longer dancing, the Meltdown of 2008 almost destroyed the entire national economy and triggered the Great Recession where the overwhelming proportion of Americans had to suffer for the greed of those who could not “stop dancing” even as they knew it was very dangerous.

While Stockman and some others believe that the Meltdown of 2008 would have “run its course” if the government didn’t bail out financial institutions, the very conservative Republican Secretary of the Treasure Paulson and the Chairman of the Federal Reserve told President Bush, Congress, and incoming President Obama that if there was not a quick bailout, the economy of the nation would crash with a depression resulting as bad if not worse of the Hoover Depression of 1929. Bush and Obama and the majority of Congress agreed and took action to avoid that. There is no way of knowing whether they were right or Stockman was. However, the people with the responsibility of governing and safeguarding the nation clearly did not want to take a chance that the advocates of no action might be wrong.

When the Meltdown hit America, the crisis drew attention to the fiscal solvency and stability of banks in most of the world. The Irish banks were much more overextended than those of most counties and when that came to light there was a bank panic in Ireland. Ahern and the Irish Dail (parliament) decided to bail out the Irish bank at a very great cost to the rest of the Irish economy and people. He believed if Lehman Brothers had been bailed out, as America did with other institutions, the Irish bank bubble would not have burst. It is not known whether he actually meant to use the word “testicles” or he made a gaff intending to use the word “tentacles”. Both have relevant meaning in the situation with a significant shade of difference in meaning between the two.

[Most Americans do not realize that not wall bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC). That insurance covers only a basic amount ($250,000 at the time of the quotation was written, but nothing over the basic amount. There is no federal insurance for all the stock brokerage accounts. There is private insurance that will generally protect against the failure of a particular brokerage company failure, but that would not help in an industry wide failure]

It was the souped up nature of the credit default swaps that was in part responsible for the souped up melt down of the economy of 2008 and the great recession thereafter. A credit default swap is an insurance policy that a company will pay off its bonds and not go bankrupt. It is a cross between an insurance mechanism and a stock exchange type security mechanism and through heavy lobbying escaped any kind of regulation. It cost a company no money to write a credit default swap and they were paid to do so. As long as business and the economy was good, it was a terrific business but there was no way of ever knowing how much risk they were taking. So companies who wrote credit default swaps did not have to have the money to pay to back them up if they business was bad. When that happened in 2008 even the largest insurance company in the world collapsed because of the risk of having to pay the credit default swap and the U. S. Government had to take over the insurance company. In 2010, the Obama administration passed a financial reform bill that began to regulate credit default swaps.

Volker was trying to reform the excesses of the banking industry in the aftermath of the Great Recession where the banks had to be bailed out by the American taxpayers.

The Meltdown of 2008 and Great Recession that it caused

He was one of the very few people who warned about the market crash of 1929 and the Great Depression.

Actually, even with higher capital requirements, the banks could take more risk but then they would have to risk their own money rather than their depositors’ funds. The depositors funds are at risk but if the risk pays off, only the bank and their executives profit. The depositors get nothing. If the bank loses their risky gamble, the major loss will be covered by the Government via a bail out and/or Federal Deposit Insurance money that protects most depositors. For the Banks, its “heads we win; tails the government loses”.

"Market mispricing" is an economic euphanism for the bankers and major investors of the nation (and abroad) bidding up the prices of the assets in order to continue to squeeze large profits even after they knew that the assets had been far overpriced. Few wanted to stop playing hoping the music would not stop in the economic game of musical chairs. When it did, there were not enough "seats" and failures casued other failures and the contagion spread.