George McCarthy Quotes

This was yet another warning about an area that became a major factor 4 years later in the Meltdown of 2008 and the Great Recession. The George W. Bush administration, however, rejected proposals to prevent more mortgage abuses by regulating the banks and mortgage brokerage industry more.

This quotation is classic as it digested the major reasons for the worst financial crises since the Great Depression into one paragraph that captured the essence of the problem. The great dispute has been ever since, who let this happen, who was supposed to stop it from happening, and who did what to correct the problem afterwards so that it would not happen again? In this situation, the Wall Street Houses had paid securities rating firms to give these bonds an AAA rating even though they were backed by very risky mortgages none of which had AAA ratings.

There was concern that there might be a housing bubble developing with consequent overpricing of houses. The bubble broke and when it did, it was sudden and dramatic with the Meltdown of 2008

This quotation has more than historical interest. The housing fraud technique of 1906 that Sinclair uncovered in his expose were essentially very similar to those that were used in the beginning of the 21st century on a much larger scale that contributed to the Meltdown of 2008, the Great Recession, and the weak housing industry for the next decade. The major difference is that by 2008, the banks and finance industry had developed ways to also get money from the taxpayer for the housing frauds. The expectation that the home buyer would not be able to keep making the mortgage payments was the key in both centuries.

The Treasure Officials had a reason for bailing out the bondholders. They were afraid that if bank bondholders and owners took big losses at that time, it would “spook” the financial markets and cause even worse panics than then existed. The political pressure would be to bail out the financial institutions which would have lost much more money after the “spooking”. So it was, they argued, less cost to the taxpayer to bail out the bondholders at the beginning and save the bailout costs later. Some argued that there was no reason to bail out the richest people in America if they lose a lot of money so it is not an issue of bail out now or later. History shoed that the financial leaders did have the clout to force the government to bail them out however. There are some who wanted to have a showdown with the wealth banks and other financial institutions and let them go bankrupt and then the economy would right itself. No one really knows for sure which is why Economics is called the “dismal science”—See {596873}.

Moody’s and Standard & Poors, the 2 largest credit rating agencies, gave A ratings to securities that had packaged terrible F-rated, toxic, subprime mortgages, and gotten the credit ratings agencies to rate them as A on the theory that the risk was diversified. Each new security like this that a bank put out was submitted informally to one of the credit rating agencies to “discuss”. If the agency “concluded” that they could give it an A rating, they received a very large fee. If not, the bank would not officially submit the security and not pay anything. That almost never happened with these packages of subprime mortgages.

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.

U. S. Treasury Secretary Larry Summers called Rajan a “Luddite” for this view, but what Rajan observed and predicted was exactly what happened in the Meltdown of 2008 which led to the Great Recession. Rajan was one of the few economists to call this right. Several, invested their own money assuming a crash and made billions. Most, like Summers and the Federal Reserve Chairmen in retrospect admitted that they missed the signs and didn’t connect the dots. See {637168}, {637987}, and {620038}

Born thought that her agency was responsible for regulating the new esoteric financial products—derivatives including credit default swaps—for otherwise there would be no regulation at all of financial products that could dwarf the stock and bond market. Summers persuaded her to back off. When the Meltdown of 2008 hit, the huge derivative exposure of the large banks and some insurance companies was so great that it was one of the major causes for the meltdown of the entire banking system. Summers, normally a great economist not only called this one wrong, but later, along with most other government and private economists ignored a very explicit warning—See {637168}, {637986}, and {620038}.

"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.

The Meltdown of 2008 and Great Recession that it caused

He was referring to Fannie Mae, the government-created. private mortage guarantee company. It was heavily regulated, and in general it met the regulatory requirements. However, the requirements were insufficient, and in the 2008 Meltdown and the Great Recession that followed, Fannie Mae itself was in such bad financial condition, that the Federal Government had bail them out or have the entire home mortgage industry fall apart.

He was speaking for the Bush Administration. He was another regulation-opposed appointee of the George W. Bush Administration. He killed many regulations that had been developed to better regulate the banks and the mortgage industry to stop many of the obvious abuses of the industry. With few regulations in place, despite warnings such as {638024}, what had been greedy and dangerous practices of a minority of the industry became the vast majority when the bubble burst in the Meltdown. Note the rhetorical device of using “regulatory intrusion” rather than “regulation” or “more regulation”. This reflected an extreme conservative view that all regulation is bad – an “intrusion”, while most conservatives want a reasonable degree of regulation and not the elimination of all regulation.

[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]