Niall Ferguson: Why We Never Learn The Right Lessons From Financial Crises

New York Times Magazine:

If financial crises were distributed along a bell curve -- like traffic accidents or people's heights -- really big ones wouldn't happen very often. When the hedge fund Long-Term Capital Management lost 44 percent of its value in August 1998, its managers were flabbergasted.

Read the whole story: New York Times Magazine

Comments

[GaryA]

Neil Ferguson is a Harvard failure. Failure of analysis seems to follow these people around. But then if we think about it, we can see that maybe this failure is also planned, just like the original banking scam of Basel 2. This article is a diversion, a way of ignoring what really happened in international banking. http://www.bank-abuse.com

[Carolab]

May 15, 2009

TARP Recipient Confesses: Bailouts a "Sham"

There are some who have been willfully ignoring the ever-expanding mountain of evidence that the trillions of dollars the federal government has been dumping into big banks are not only being acquired via illegal means, but will also fail to save the banking system.

Mark Patterson, chairman of TARP beneficiary MatlinPatterson, publicly declared May 14 that the bailouts are a "sham," that the big banks are all "insolvent," and that the financial industry is "deluding itself." There's a lot that you should hear (read) straight from the horse's mouth (at link):

http://www.meltingpotproject.com/mpp/2009/05/tarp-recipient-confesses-bailouts-a-sham.html#more

FASB Rule Will Force Banks to Move Assets Onto Books (Update1)

May 18 (Bloomberg) -- Citigroup Inc. and JPMorgan Chase & Co. will be required starting next year to add billions of dollars of assets and liabilities to their balance sheets under rules approved by the Financial Accounting Standards Board.

The FASB vote today eliminates the so-called Qualifying Special Purpose Entity, a type of trust that was exempt from balance-sheet treatment.

In July, FASB postponed by at least a year the effective date of the changes after banks and trade groups complained. The Securities Industry and Financial Markets Association and the American Securitization Forum said the measure may make companies appear to be short of capital during regulatory reviews.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aF7xhCfMRWAI

[PhilipTaylor]

At least we have them admitting the truth the Bailouts are a massive RIP-OFF of the Taxpayer!

With $700 Trillion in Toxic Debts how could one year of GDP (a measly $13 Trillion) hope to help the massive problem that could take two or more decades to resolve!

This is simply giving Geithner's and Bernanke's Buddies a WELFARE Send-Off!
__________­__________­__________­__________­______

Lets see if that RULE is ever enforced?

[PhilipTaylor]

At least we have them admitting the truth the Bailouts are a massive R1P-OFF of the Taxpayer!

With $700 Trillion in Toxic Debts how could one year of GDP (a measly $13 Trillion) hope to help the massive problem that could take two or more decades to resolve!

This is simply giving Geithner's and Bernanke's Buddies a WELFARE Send-Off!
__________­__________­__________­__________­______

Lets see if that RULE is ever enforced?

[Carolab]

It was already delayed a year and has been pushed off until next year!

[Carolab]

I dawned on me. The TALF is designed to remove these toxic debts from the banks' books by pawning them off on investors. A year should give them more than enough time to clear the books. That's why the TALF is such a "good deal" for the investors. They essentially have no risk because their investment is so low, plus they can leverage the assets 6:1, collect, and then dump them if they go bad.

If the investors walk away, the assets are off the banks' books and the Fed (taxpayers) are holding the bag.

[BabblingBrooks]

The answer is--and this is the 100% truth--to why we don't learn from these economic crises is that THE TRUTH SEEMS WRONG AND HARSH AND THE WRONG ANSWERS SOUND WARM AND FUZZY AND COMPASSIONATE!

Letting companies go bankrupt and letting their assets be re-allocated to productive activities and successful companies by the free market would work. Government invention to "save jobs" doesn't work!

And, by the way, do you know that your taxes and those of every single taxpayer would have to go up 81% to pay for all the government bennies NOW PROMISED UNDER LAW?

Do you think--THINK!--that government has simply grown too big and promised too much?

[BabblingBrooks]

Meant government INTERVENTION. Sorry.

[HeevenSteven]

That was a surprisingly stupid essay from Ferguson. The problem, that he deliberately sidestepped, was the complete lack of serious risk management; it was all kick the can down the road. That IS something previously existing regulation could have prevented.

[Albertmum]

Did anyone see Elizabeth Warren on the Daily Show explain the boom and bust cycle we were in from the beginning, 1792 or something, to 1929. Every 5-10 years, boom and bust, prosperity and lose everything. Then during the 'geat depression', government instituted regulations in the banking/finance industry. We had nearly 50 years of stability. Then in the 80's government decided the regulations were too time consuming so they starting pulling them and we had the S&L crisis, etc. She ended the segment by saying we either keep going the way we are and good luck on your 401 K's or we re-institute the regs and get back to stability. At least that's what she said. Makes sense to me.

[DiogenesOfAlaska]

2/2

You write: 'It is more than a little convenient for America’s political class to blame deregulation for this financial crisis and the resulting excesses of the free market. Not only does that neatly pass the buck, but it also creates a justification for . . . more regulation.'

Now that's an interesting twist. Are we to conclude that more regulation would automatically be more bad regulation, so that it would be even worse than deregulation by your previous claim? And how is it beneficial for the incumbent administration to blame deregulation - in which previous Democratic administrations had a part?

The best is of course to make the final argument by a latin phrase. Who regulates the regulators? The only problem is, Prof. Ferguson, you misinterpret the challenge. Yes, it is indeed difficult to answer the question who would regulate the regulators. In particular since the first to come to my mind would be Harvard professors of economy. You really made me think again.

But please, do tell me: how can you seriously claim after this crisis that the difficulty of the question who should regulate regulators works in favor of the status quo before the crisis? Please do not kid yourself: the fact that regulation is hard by no means on earth implies that you can do without it. What it means is that you need to think about it, hard.

[swift goat pet for truth]

"Please do not kid yourself: the fact that regulation is hard ..."

How hard could it be?
Why can we not have the same rules that were in place before those rules were recinded?

Or, can we not just limit the scope the businesses can legally enter, similar to Canda's or Norway's banking laws? That banks must be 1) small, 2) limited in the scope of their business.

[DiogenesOfAlaska]

Prof. Ferguson makes a valid point when he asks: who should regulate the regulators. Part of the problem is that regulations often aren't enforced even when they are in place. And sometimes they are even openly NOT enforced.

There are many ways of limiting the scope of business a bank can enter, and one of them is the limit on risk-weighted assets that Prof. Ferguson criticises in his article as one of the many ways in which Basel I and II have failed. He proposes instead a less elaborate limit on leverage. Part of the reason why regulation is hard is because there is a dilemma here: from a theoretical perspective, a much more elaborate measure for leverage is needed, due to the complexity of the financial products. On the other hand, transparency and disclosure didn't even work at the current level of elaboration. What this means is that there is little choice for the financial sector but to shrink: both in size and in complexity. Which isn't necessarily healthy for the rest of the economy... that's why it's hard.

[DiogenesOfAlaska]

1/2
Prof. Ferguson, it is good to notice that you have finally left conservative dogma behind you. Otherwise it's hard to explain why you quote human psychology and allow for the existence of systemic crashes in your financial worldview. Nor would it make any sense to take a look at history if you believe in efficient markets.

So you've changed your mind. Fine. Except that you didn't. (From which I shall eventually conclude that your current point of view is self-contr­adictory.)

You write 'The reality is that crises are more often caused by bad regulation than by deregulation.'
And you seriously question whether deregulation had anything to do with the crisis. Well, to the extent that many of the instruments that failed to be regulated properly didn't even exist when the decision was made to NOT regulate them, you may be right, because they were, in fact, never regulated, so they couldn't be deregulated.

[PoliticalRockChick]

No, People know the answers, it's just greed. It's simple greed. Before the financial meltdown, people were divided on the war. They were more concern about stupid topics such as gay marriages and whether the President was religious or not. I mean some still do, but it seems its not the number priority to them. Once you start messing with people's money, all the other stuff it doesn't matter as long you don't mess with people's money. Money is god to people. I should say Money is God to American. It says it right on the American dollar bill. I think America is the only country, where it's stated in God we trust right on their money.

[jetscan]

Correct! Or should I say "amen" (pun intended, heheh)

[pd78758]

from the article:
"If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth."

Not really when the growth turned out to be unsustainable and was nothing more than a bubble that take back most of the gains.

Without regulation (I'm talking about enforcement too), the only regulating mechanisms for the free markets are base human motives like greed and wanton self-interest. Strong, sustainable economies cannot take root in that environment.

[research]

We learned just fine from the Great Depression.

FDR was right,

And you deregulators are still wrong.

[TrooAmerican]

I disagree with the article's headline.
I know the lessons are learned.
Thats not the issue. The issue is that those in power refuse to act on those lessons in the appropriate manner because those that are continuing to fleece america continue to give so much money, favors, perks, and future promises of great wealth, those in power become the donors not the puppets that are elected.

[jetscan]

I disagree. When you burned yourself as a kid, you stopped messing around with matches/fire. You're not going to put your hand on a hot stove are you? That's what I call "lesson learned". Those in power have never learned any lessons, they are just arrogant and think it will all blow over. Business as usual.....

[TrooAmerican]

Thats my point though. They Dont Get Burned from playing with matches.... They burn everyone else.
Who in this entire set of groups has continued to profit from the beginning to the end.... or currently?
The rich who are in power pulling the strings.
Who of that group are hurting?
Everyone else seems to be, but not the top echelon of CEOs, Billionaires, and Power brokers calling the shots on Wall street.
There was just another article today about 3 "disgraced " ceos that left with hundreds of millions, who happen to be back on wall street already.

Explain that to the lower level wall street workers that are standing on NYC street corners still looking for work, who did nothing wrong.

[swift goat pet for truth]

"I know the lessons are learned."

Not by the Freidmanites.

[NotesFromME]

Just another stunningly idiotic defense of the status quo. The problem is that these idiots teaching at Harvard believe this crap and teach it to the rising generation of Wall Street thieves.

"No, it was NOT corporate greed, over-leveraged banks, bogus credit swaps, or Bernie Madoff--it was the REGULATIONS that were not being enforced by the Bush administration that were to blame!"

[TrooAmerican]

well.... I think you could start with corporate greed, which spawned a lessening of regulations and reduction in enforcement, which then provided for the over-leveraged banks and dcs, and those like madoff as results instead.

There are causes and effects.
The causes are the bribes to a particular political party that wholesale cleared the path for the criminals to steal, and then set it up to do so again by installing Paulson into the Treasury.

Its been a masterminded plan from the beginning and its come to full fruition.

[jetscan]

Yep, and Elliot Spitzer fell in the trap which was set up for him. Too bad, he's a very intelligent man, but also human. If only Obama would kick out Geithner and Summers and give Spitzer a second chance. The devious ways of Wall Street......

[PhilipTaylor]

PURE BS!

Time-line: Bush-Wall Street Corrupt Housing Crisis 5 Years to Ruin America!

2002=Video: Younger Bush Pushing "EASY Loans" on Minorities
2002=Bush Video=http://www.youtube.com/watch?v=kNqQx7sjoS8&feature=related
2002=Bush Enlisted Investment Banks issue "EASY SURE FAIL" Mortgages
2002=Bush Proclaims Enlisted Fannie/Freddie to buy Garbage Mortgages
2002 FED+Bush Admin=high priority on "financial innovation"+Bush"s "ownership society"
2002 FED=Used housing boom to prop up economy after 2000 market collapse
2002 FED governor=warned: lenders breeding fast-growing risky mortgages
2002 FED examiners=­investigat­e mortgage lenders of WSBanks
2003+2004=FED analyst: deteriorating lending standards+higher defaults+f­oreclosure­s
2003+2004=FED encourage development of alternative mortgages=subprime loans+adjustable
2004=Comptroller Curr (OCC) used 1863 law=prevent enforcement state predatory lending laws
2004=OCC=prevent states enforcing consumer protection laws against Banks
2004=Link: http://www.nakedcapitalism.com/2008/02/spitzer-bush-administration-blocked.html
2007=FED+F­DIC+OCC=Ru­les=NO new loans to poor after 'teaser' rates expire 2-3 years
2007=FED+F­DIC+OCC=Bl­ocked Half of Subprime borrowers from refinancing=Forced Failure
2007=FED decisions=too late to tame industry but Helps Banksters win AIGCasino Bets
2007-2009=20-30% Subprime didn't meet Refi thresholds,But 70-80% would without new rules
2007-2009=2 million teaser-rate loans expired without refis
2002-2008=Graph of Housing Bubble showing straight up line 2003-2007 (below)
2007=Bubble fed by "Easy SURE FAIL" Mortgages BURST creating CRISIS
2008=Green­span=sayin­g FED ill-equipped to investigate deceptive lending=False
2009=Greenspan consulting gig PIMCO+asset manager GSE mortgages+senior bondholder
Graph=http://www.mortgagecalculator.org/images/us-subprime-mortgage-market-growth.png

Research:CarolAB

[Carolab]

Sunday, May 17, 2009
Reforming Credit Default Swaps and OTC Derivatives

Not only are the largest derivative dealers fighting efforts to reform the CDS and other derivative instruments that caused the AIG fiasco, but regulators like the Fed and US Treasury are working with the banks to ensure that a small group of dealers increase their monopoly over the business of over-the-counter ("OTC") derivatives.

The immediate objective of JPM and the dealer community is to counter attempts to truly regulate and, most important, make standardized commodities of OTC derivatives, even as the dealers clothe the new regime proposed by Tim Geithner for clearing and trading OTC contracts in the language of reform, transparency and efficiency.

If the NYSE and CME were to trade derivatives, the big banks knew they would not be able to control their fees or capture the profits from clearing. Therefore, they sold The Clearing Corp. to the Intercontinental Exchange, or ICE, a recent start-up in the OTC derivatives business which had been funded with money originally provided by, you guessed it, the banks.

In the deal with ICE, the banks receive half the profit of all trades cleared through the company. And the large OTC dealer banks made sure, through their connections with officials at the Fed and Treasury, that ICE was the winner chosen over the NYSE and CME offerings. That's right, we hear that Geithner personally intervened.

http://marketpipeline.blogspot.com/2009/05/reforming-credit-default-swaps-and-otc.html

[pm247]

This kind of rambling, unfocused essay only helps Wall Street racketeers cover their tracks. The fraud and larceny must be stopped and the perpetrators jailed - that's the lesson.

[loki]

Start by ending stopping the people who create these greed driven people and the environment they flourish in. Ivy Greed schools, their highly praised professors who brain wash and train their alumni to destroy for greed and profit in the corporate and government . Its a horrible cycle that has created the problems we have seen over the last 100 years. Think about this. Every single economical disaster we have including the crash of 29, has had Ivy Greed educated people at the helm. Now if that is not enough to make you consider just what evil these places are producing, then what is?

[sonofsamphm1c]

Too funny. When Ferguson hammers Obama's economic team, he's the darling of THP.

In addition to bad regulations, there are also bad regulators. The Bush administration proved that.