Government Economic Policy Has Been As Bad As Its Policy Towards ISIS or Ebola
What’s causing the market to tank?
Lets turn back the clock a couple of days, when the head of the International Monetary Fund said that there was too much financial gambling (based on overly-low interest rates):
“A sudden shift in sentiment could easily cascade across the entire globe,” IMF Managing Director Christine Lagarde told the fund’s governing board. “There is too little economic risk-taking, and too much financial risk-taking.”
And let’s travel back 2 weeks:
The recent edition of the Geneva report – “an annual assessment informed by a top drawer conference of leading decision makers and economic thinkers” – finds that the “poisonous combination” of spiraling debts and low growth could trigger another crisis. The report also notes:
Contrary to widely held beliefs, the world has not yet begun to de-lever and the global debt to GDP ratio is still growing, breaking new highs.
And as the Telegraph puts it:
On a global level, growth is being steadily drowned under a rising tide of debt, threatening renewed financial crisis, a continued squeeze to living standards, and eventual mass default.
(A number of billionaires also believe a crash is imminent.)
This is not surprising …
Excessive leverage was one of the main causes of the 2007-2008 crisis … and yet governments responded by encouraging more leverage.
And bad government policy has driven the entire world into debt.
Indeed – instead of fixing any of the real problems which led to the 2007 crisis – governments on both sides of the Atlantic have simply tried to paper over them. It’s pretty clear how this movie is going to end …
Government agencies have helped banks manipulate commodities prices for decades.
The government twisted statistics and intentionally lied when it pretended that the banks it was bailing out were solvent
The government has long ignored energy and food prices when reporting on inflation.
Fraud is Wall Street’s business model, which is – unfortunately – being supported by the government.
The government helped cover up the crimes of the big banks, used claims of national security to keep everything in the dark, and changed basic rules and definitions to allow the game to continue. See this, this, this and this.
It is not only a matter of covering up fraud that has already happened. The government also created an environment which greatly encouraged fraud. Here are just a few of many potential examples:
- The SEC has shredded financial documents for decades, to help cover up financial shenanigans
- The Treasury department allowed banks to “cook their books”
- Business Week wrote on May 23, 2006:
“President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations.”
- Regulators knew of and allowed the use of debt-hiding accounting tricks by the big banks
- Tim Geithner was complicit in Lehman’s accounting fraud, (and see this), and pushed to pay AIG’s CDS counterparties at full value, and then to keep the deal secret. And as Robert Reich notes, Geithner was “very much in the center of the action” regarding the secret bail out of Bear Stearns without Congressional approval. William Black points out: “Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth”
- The former chief accountant for the SEC says that Bernanke and Paulson broke the law and should be prosecuted
- Freddie and Fannie helped to create the epidemic of mortgage fraud
- The government knew about mortgage fraud a long time ago. For example, the FBI warned of an “epidemic” of mortgage fraud in 2004. However, the FBI, DOJ and other government agencies then stood down and did nothing. See this and this. For example, the Federal Reserve turned its cheek and allowed massive fraud, and the SEC has repeatedly ignored accounting fraud. Indeed, Alan Greenspan took the position that fraud could never happen
- Bernanke might have broken the law by letting unemployment rise in order to keep inflation low
- Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy, when they were not
- Arguably, both the Bush and Obama administrations broke the law by refusing to close insolvent banks
- Congress may have covered up illegal tax breaks for the big banks
- Of course, deregulation by Larry Summers, Robert Rubin, Phil Gramm and many other high-level politicians and regulators also helped to grease the skids for fraud
Economist James K. Galbraith wrote in the introduction to his father, John Kenneth Galbraith’s, definitive study of the Great Depression, The Great Crash, 1929:
The main relevance of The Great Crash, 1929 to the great crisis of 2008 is surely here. In both cases, the government knew what it should do. Both times, it declined to do it. In the summer of 1929 a few stern words from on high, a rise in the discount rate, a tough investigation into the pyramid schemes of the day, and the house of cards on Wall Street would have tumbled before its fall destroyed the whole economy. In 2004, the FBI warned publicly of “an epidemic of mortgage fraud.” But the government did nothing, and less than nothing, delivering instead low interest rates, deregulation and clear signals that laws would not be enforced. The signals were not subtle: on one occasion the director of the Office of Thrift Supervision came to a conference with copies of the Federal Register and a chainsaw. There followed every manner of scheme to fleece the unsuspecting ….
This was fraud, perpetrated in the first instance by the government on the population, and by the rich on the poor.
The government that permits this to happen is complicit in a vast crime.
Let’s rewind 2 years, when we showed that never-ending war destroys our economy.
Let’s step back 3 years, when we noted that the economy would crash again unless we fix the following core problems:
- Rampant fraud
- Worse-than-third-world inequality
- Insanely high levels of leverage
- Warping of the economy and the political process by a handful of monstrously bloated banks
- Focusing on policy objectives other than reducing unemployment (which has the net effect of actually increasing unemployment)
And let’s flash back 6 years, when we showed the the root of the economic crisis was dishonesty.