Hiba's curmudgeonly musings about books, politics & other trifles.

Overdose: the next financial crisis

In the documentary, Vernon Smith, specialist in behavioral and experimental economics and puts economical theories to the test. George Orwell also talks about the ‘Big Brother’ society and how the state controls its citizens.  The documentary goes on to examine low interest rates and housing loans encourage citizens to take out second mortgages on old houses to fund consumption. Legislation was more aggressively pushing lenders to lend people of modest means, who’s income were 80% of the median income or below. Left and right politician parties were encouraging home ownership and created deductions, subsidies and insurances. Freddie Mac and Fannie Mae were used (both are for expanding the secondary market for mortgages in the U.S) to ensure loans to people who couldn’t get them on the open market. Both of them are government sponsored enterprises. They had private owners but they had been created by the congress since transactions are guaranteed by the government. These two mortgages companies donated more than 200 millions to politicians in Washington. Former Freddie mac chief economist, Robert Van Order, when asked what they got for their money, he said they had a good charter and were regulated in a spotty way. The regulatory structure wasn’t that bad but it was the case that the regulatory structure was a compromise, it wasn’t in treasury nor in housing it was in between.

Peter P. Schiff, CEO and chief global strategist of Euro Pacific Capital, mentioned how there was a huge moral hazard courtesy of the government in mortgage market when they threw Fannie Mae and Freddie mac and started to guarantee mortgages then the leaders were no longer worried about getting their money back because the government were guaranteeing it.

A moral hazard in the banking system existed because since some people were unable to sustain down payments for house ownerships, taxpayers money was used to help qualified low-income buyers with their downpayment. Therefore if the house keeps going up, he or she makes money if however it stops increasing the bank then loses its money. The U.S. Government guaranteed all bank losses, what does that mean exactly? Depositors don’t care what banks do with the money when they make the deposit because of the promise the government made to them. Why can’t mortgages be financed in the private sector? because private sectors wouldn’t finance these crazy mortgages and real estate prices would have to come down to levels that people can afford. Everyone wanted to buy because the rating agencies that rate securities gave mortgage-backed bonds their highest rate. They promised huge pay offs at near zero risk. These rating agencies thought house prices would just keep rising then there was a minor detail that rating agencies were being payed by the sellers of the securities… (corrupted system) There are only a few companies who are authorizing these bonds so it wasn’t really a free market since the government was in bed with Moody’s and Standard & Poor.

But you also have this perverse relationship between Wall Street and rating agencies where they were paying the rating agencies to rate the products they were structuring. This was a distorted relationship where they knew if they put bad ratings on them, that they wouldn’t sell and if they didn’t sell they wouldn’t be making all this money constantly rating them.

“Market on Steroids” Loans were cheap enough to keep housing rising up but when interest rates returned to normal levels in 2006 the spell was broken. People could no longer get new loans to pay off the old ones. Those who had been given a mortgage despite their low income couldn’t afford to stay. Prices started falling making mortgage security worthless. Rating agencies removed high ratings from the securities. Investors who never looked beyond the rating suddenly didn’t know what they had bought. They didn’t know how risky these loans were.

The dominos started falling. Investors stopped buying mortgage-backed securities and refused to lend to those who were depended on them. Investment banks like Bear Stearns and Lehman Brothers suddenly couldn’t get new loans to stay in business. Fannie and Freddie could no longer hide the disaster.

Dot-Com bubble then burst then re-inflated with real estate credit crisis bubble then that burst now the bail out bubble economy is. Gerald starts to mock the system and say, “Hey, need more money? how about the stimulus package?” From Australia, US, UK, to China they were all starting to dump in funny money into the system to keep it going. The federal government would put up to 700 billion taxpayer dollars on the line to purchase trouble assets that were clogging the financial system. Wall street wanted to cover their bad deals and the US wanted to spend therefore even banks who didn’t want the money were forced to take it because they didn’t want the public to know which banks were on the brick of collapse. On October 3rd, the congress approved the biggest financial bail out in history (700 billion dollars) Germany, Italy, Canada, South Korea, Great Britain and other politicians started to follow that same trend and did the same with their banks in order to protect the stability of the financial system.

David M. Walker who served as the US Comptroller General from 1998 to 2008 (director of the government accountability office) quit because he was so worried about the U.S economy that he wanted to have the freedom to warn about what may happen. In his point of view the bailout was necessary in certain regards but in many cases it was a waste of money because three things should’ve been done:
1) Have clearly defined objectives about what we’re (the government) trying to achieve.

2) Have criteria established up front as to who could get the money and who wouldn’t.

3) Have concessions established un front as to what they could and couldn’t do with the money and as a result of not having those three things: some people got the money that didn’t deserve it and other people got the money that didn’t make good use of it therefore a lot of waste with regard to taxpayer money.

Domestic Industry:
Situation of oil industry became critical. In November 19, CEO’s fly to Washington to demand money. Megan McArdle, business economics editor of The Atlantic (financial analyst) said the executives came out and said: “If you don’t do this we are going to see a jobs holocaust” they issued high estimates of how many jobs would be lost. A month later, Bush gives billions of dollars to general motors and Chrysler from the bailout package that was really only signed to save the financial industry. Bush mentioned how the US auto executive said their companies are nearing collapse and the only way they could buy time to restructure was with the help from the federal government.

More info found here: https://cei.org/blog/did-bush-save-general-motors-obama-messed-chrysler

Megan goes on to explain how the congress wanted an excuse to bail out the auto workers and executives and gave them enough political cover to say “Ah well I’m not really doing this because I want auto workers to vote and I’m going to give them huge amounts of money, I’m really doing this for the american economy”

Gerald Celente: The Wall Street can’t take their losses, they are just cry baby capitalists. They preach capitalism on everybody but themselves. The federal reserve cut its key interest to lowest level on record.

Dec 16 2008 ‘It is time again to pour alcohol into the punch bowl’ Federal reserve reduces interest rate to practically zero to restore investor confidence, other central banks do the same.

Statistical data 1971 – present

http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html

Peter P. Schiff “The housing bubble that they inflated blew up with all the carnage and bankruptcies and now their solution is something they did before! Instead of having interest rates at 1% lets have them at zero and lets buy everything we can. Print money and buy mortgages and buy student loans, buy bonds, drop money from helicopters, to try to get the same risk taking, excessive gambling, let’s try to convince americans who are already on debt to go out and buy more things, to go deeper into debt and if banks don’t want to lend the money let’s make them lend the money” – Economic suicide.

While they lower interest rates, Obama creates a stimulus package to get the US economy going. Obama: We are running out of traditional ammunition thats used in a recession which is to lower interest rates, getting to be as low as they can go.

17 Feb 2009
American Recovery and Reinvestment Act is signed and approved by Obama, worth 787 billion dollars, this stimulus package was made to save and create jobs almost immediately. Secondary objectives were to provide temporary relief programs for those most impacted by the recession and invest in infrastructure, education, health, and renewable energy. With a bush stimulus package from the year before, these politicians have spent close to 1 trillion dollars to stimulate the US economy. The money is spent on roads, airports, education, unemployment and other benefits.

David M. Walker: We had a 787 billion dollars stimulus bill but only 1/3 of it was truly stimulus by that I mean timely, targeted and temporary. The other 2/3 were things people wanted to do, have wanted to do for a long time but they didn’t want to have to pay for it. They wanted to do it as part of an emergency legislation and charge it to the national credit card. A related example (apart from the US) Germany spent 700 billion dollars to scrap fully functional cars they called it the environmental package so they don’t sound ridiculous.

Dr. Karen Horn (on motor industry using bonus money) I was surprised people accept the idea so readily, that they would accept the money is something else, who wouldn’t? but that they would find this a solution that they deemed viable, doesn’t give me a good impression of the rationality of the voter and tax payer I must say.

Peter P. Schiff: The problem is so big that the government stimulus is not going to us another 5-6 years of phoney growth like it did last time because we have to accumulate so much more debt now because the bigger the problem gets the more we have to stimulate to get that short-term boost but now we have a bigger stimulus to get out of the economy.

It’s not just the U.S that’s increasingly looking like a house of cards, during crisis many governments went deeply into debt, estimates say; the average debt in the richest nations will exceed 100% by the year 2011, these are loans taken at currently low interest rates, should the interest rate rise by 1% the U.S interest payments will rise by 100 billion dollars per year, that’s more than the annual cost for the Vietnam war.

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Since I’m a documentary fanatic here’s a list of documentaries I want to watch soon, and a website listed which offers a wide range of them from crime, history, science, military and war, conspiracy, health and so on. If you know a little about me you’d know how much I love forensic/criminology studies which is why I highly recommend anyone who shares the same interest to check this link: http://documentaryaddict.com/

Here’s the list:

Inside Job: a 2010 documentary film about the late-2000s financial crisis directed by Charles H. Ferguson.

Dirty Wars: investigative journalist travels to Afghanistan, Yemen, Somalia, and other countries where the United States has taken military action in the war on terror.

Whitey: documentary on a man who’s listed as second most wanted list in America, this man terrorized the city of Boston for years without ever being charged with so much as a misdemeanor.

Death on the Staircase: courtroom thriller revealing an inside look at a high-profile murder trial.

The Thin Blue Line: film about a man who was wrongly accused of murder by a corrupted justice system in Dallas, Texas (rated 8.1 so worth looking into)

The Fog of War: film about former US Secretary Of Defense, Robert S. McNamara and lessons he learned about the nature of modern war. (rated 8.2)

Target Mafia: Empire of Crime: examines mob activity during World War II; the murder of Benjamin Siegel; nightclubs, casinos and racetracks linked to organized crime. In the 1930s America was in a depression but the mafia was thriving. After the end of prohibition the mob made money from the legal liquor trade. The relationship between two men would prove to be a critical partnership in the history of the mob. Bill Kurtis hosts.

Art of the heist: The Man Who Stole the Mona Lisa: On a summers day in 1911 a man walked into the Louvre, took the Mona Lisa off the wall and walked out. He had stolen the world’s most famous painting as thousands of people queued to see the empty space the painting had left. This episode follows the trail of the eccentric thief who undetected , left France trying to return the Da Vinci painting to Florence where he thought it belonged.

The Internet’s own boy: Story of Aaron Swartz: The story of programming prodigy and information activist Aaron Swartz, who took his own life at the age of 26. (rated 8.2)

Since I love Anonymous, here’s one called; We are Legion: The story of the hacktivists: documentary on the workings of the hacktivists group known as Anonymous. And here are two recent links they uploaded, one about ISIS https://www.youtube.com/watch?v=02wenMeSrzc. And one about the response to the Ohio cop kidnapping https://www.youtube.com/watch?v=b4e0uxfyaO4
You can read about it here: http://countercurrentnews.com/2014/11/

Cuban Missile Crisis Declassified: In 1962 when missiles were placed in Cuba in order to be prepared for any possible invasion from America, Kennedy demanded that they be removed and risking the first nuclear exchange between superpowers, this documentary offers some insight on the lack of sufficient communication and how little each side understood each other, those being Moscow and Washington.

Our Nixon (rated 6.6) this was filmed by Richard Nixon’s closest supporters – and convicted Watergate conspirators – offer a new perspective into his presidency.

Gasland (rated 7.8) this documentary is about rural american landowners waking one day to finding an energy company that wants to lease their property. The reason for this is because the company wants to tap into a reservoir dubbed the “Saudi Arabia of natural gas”. Haliburton finds a way to get the gas out of the ground through a process called “fracking” (hydraulic drilling process) and sooner or later America finds itself on the verge of becoming an energy superpower.

The House I live in (rated 7.9)
Eugene Jarecki is a master of political documentaries, but this film from 2012 about American drug policy feels like Game, Set and Match to his side of the argument.  He systematically documents the disproportionate effect that the ‘war on drugs’ has on poor and ethnic minority communities.

One of the most shocking parts of the film is the ignorance of the general public on the street about whom their government is locking up.  A terrifying film that could be seen in years to come as a tipping point in the relaxing of drug legislation.

The Square: In 2011 Egypt followed in the footsteps of Tunisia and had a revolution that led to the overthrow of Hosni Mubarak.  This was the beginning of what has largely been patronizingly classified (in the West) as the ‘Arab Spring’.  The civil disobedience in the country largely centred in a part of Cairo called Tahir Square: a roundabout that hosted a community of protesters that promised to live in tents until they got modest emergences of democracy.  The Squarefollows a number of people as they risk everything for principles that people in Western countries take for granted every day… an ultimately humbling experience.