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It becomes a crisis if a sufficient mass of political leaders (people with followers) deem it necessary to elevate the debt problem to something requiring substantial applications of political power to resolve in favor of one group of people or another.

Unfortunately, this seems to be the course taken to date, with bad loans from which Wall Street profited now being transferred to GSEs with taxpayer guarantees. I am all in favor of writing down bad debt and forcing banks to acknowledge the true value of the "assets" on their balance sheets. But very few in Washington have any appetite for this. Almost every action to date has been to hide bad assets, relax accounting standards, bail out the perpetrators and ignore the fraud.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Apr 14th, 2010 at 02:33:39 PM EST
[ Parent ]
I know what you mean, but I think it is still more ambiguous than that.  For example, did "Wall Street" really profit from the "bad" loans? Or did just some people on Wall Street -- mainly those who repackaged them and re-sold them to other investors as securities profit while many others suffered losses from them? And what about main street?  Did everyone on main street really suffer from the bad loans, or didn't quite a few people obtain loans for properties they otherwise would not have been able to, most of them profiting from them, even if many of them, and others, have ended up losing their homes as a result of the recession?  

Finally, what would have happened and whom would have been hurt most if governments did not bail out the suddenly insolvent banks? Would the crooks that caused the problem really have faced some kind of justice, or would a more complete collapse in lending than what actually occurred have just result in even more innocent bystanders losing their jobs and homes due to an unnecessarily exaggerated economic crisis. Sometimes it's good policy to let crooks off easy --  even with their loot -- in order to save many more people from deprivation.

by santiago on Wed Apr 14th, 2010 at 05:45:11 PM EST
[ Parent ]
There were, of course, victims and predators on Wall Street and winners and losers on Main Street. Goldman Sachs and J.P. Morgan were highly successful predators. A.I.G., Bear Stearns and Lehman Bros. were unsuccessful would be predators who ended up as victims. The taxpayers as a class are victims via the toxic mortgages stuffed into GSEs and, quite likely, from much of the "trash" the Fed has taken in return for "cash".

On Main Street I was a winner. I bought for 3% down at $2 in '99, sold at $5.6 in late '07 and ended up with no debt, a larger house on 1 1/4 acre in Arkansas free and clear and more than the house cost me in the bank. I could smell the fraud after 2003. Fortunately, I was close to retirement age and had the money to survive until I was 65 and started drawing SS and got Medicare. Even better, I continued to have work in LA through '07 at my consulting rate, even if it cost me more for travel and accommodations. But the GFC trashed my business and I made very little last year. All in all, we have been very fortunate.

Deciding whether to let looters get away with their loot in order to save the innocents would and should be a painful decision, but it was never really made. I have seen little evidence that prosecution of fraud would disrupt the economy. More likely is that it would deter future fraud, but, as yet, it isn't even on the table. However, in the first few days of this week I have seen mention of massive fraud in several mainstream media outlets, including the NBC Nightly News, the New York Times and the Arkansas Democrat Gazette. Possibly some WaMu executives could be charged. That would be a start. But I am not holding my breath.

Were vigorous fraud prosecutions to take down all of the TBTFs it may product some temporary dislocations, but, if done properly, it would also result in writing down much of the bogus debt which is currently strangling the economy and cutting "Wall Street" to a half or a third of its present bloated size would be a net plus for the economy as it would remove a massive parasite from the body politic and economic. It would also make easier instituting needed reforms to redress the current extremes of wealth distribution which are also strangling the economy, IMHO.

The whole GFC could be readily dealt with could we only find a way to bulk erase the poisonous programming that has been written into the popular mind over the last forty years regarding the nature of the society and economy. That legacy is the true problem.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Apr 14th, 2010 at 07:43:45 PM EST
[ Parent ]
Fraud should always be prosecuted, no ifs and or buts.  But the real crooks -- the ones who are behind the crisis -- are too slick to have done anything truly illegal, mostly because the rules were written by or for them regarding financial deregulation. It wasn't law breakers that caused the crisis.  It was that the laws themselves were created to allow such crises to occur and for many to profit from such conditions.  The real perpetrators are guilty of grave moral failings, not legal ones, for the most part.

And, just as it is often counterproductive during a war to be overzealous of justice during negotiations for peace with perpetrators of great crimes, it would have been wrong for central bankers and government regulators to be threatening private bankers with legal actions when their cooperation was still needed to avert a still wider financial panic. Only now, when the damage has been averted and there is little more that can happen due to bad bankers, some measure of justice can be sought, through courts or through policy changes.

by santiago on Wed Apr 14th, 2010 at 09:23:36 PM EST
[ Parent ]
It wasn't law breakers that caused the crisis.

Agreed. See this comment and Yves' linked post about Magnetar. If we could get some convictions at the WaMu, Lehman, Bear Stearns, Citi level, or at the level of mortgage brokers and aggregators, then we could at least have the makings of a scandal and could start up the chain. But, to date, there is nothing. TPTB possibly don't want ANY real investigations and prosecutions for fear of things unraveling. I don't know for sure, but strongly suspect that is the case. Perhaps the strategy is to push it down the road until Obama leaves office. It is such bad form, you know, to prosecute the members of previous administrations. Obama has taught us that.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Apr 15th, 2010 at 01:27:41 AM EST
[ Parent ]
Dylan Ratigan had a puppet show segment explaining the financial crisis.



Wind power

by Jerome a Paris (etg@eurotrib.com) on Sun Apr 18th, 2010 at 06:04:04 AM EST
[ Parent ]
ignore the fraud.

ignore....as in reward?

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu Apr 15th, 2010 at 05:03:26 AM EST
[ Parent ]
Successful fraud is its own reward.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Apr 15th, 2010 at 10:26:44 AM EST
[ Parent ]


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