The Myths and Realities of the 2008 Financial Crisis

Tuesday, January 29, 2013

"As long as the music is playing, you've got to get up and dance. We're still dancing."

Those were the now-infamous words from Chuck Prince, then the CEO of Citigroup, on July 8, 2007, the eve of the credit crisis that eventually led to the worst recession since the Great Depression.

For Alan Blinder, former vice chair of the Federal Reserve Board and a professor at Princeton University, Chuck Prince's quote succinctly explains the problems with the financial and housing markets that led to economic collapse just a few years ago. Blinder explores the Great Recession and its aftermath in his new book, "After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead."

Blinder says: "When the lending world…looks safe because recent performance have been so good…people forget the past. They forget that loans sometimes go bad."

Another issue that led to the collapse, Blinder says, was lack of information and transparency: "You had treasurers in hamlets in Norway, and Italian pension funds, and things like that, buying these securities without really knowing what they were buying."

Guests:

Alan Blinder

Produced by:

Jillian Weinberger

Comments [3]

Ken Atwell

Journalists today don't seem to do any background research because they know they won't chalenge their guest. But a quick look at the Fed publications during that time would have revealed the Greenspan Kennedy reports that the easy money was not helping people buy a new house but instead withdraw equity for consumption. Equity withdrawals equaled a substantial part of GDP growth during the bubble so it politically couldn't be stopped.

At the same time we had Prof. Shiller who became the home price guru announcing never emding home price increases in the double didgit range when in fact his own research showed that more tha one percent could not be sustained long term. But when he sold his consulting firm to S&P he never suggested caution. S&P's own research director, after the bust, said he had no idea where his analysts found a basis for AAA ratings on derivatives.

After the great depression the Federal Government idenrtified three ratings agencies as the sole arbitors of what was an "investment grade" bond for insurance, banks, pensions, and governmental agencies to use as capital. But when all three of these agencies went public and shareholder returns rather than integrity became the goal, the government never sought ant oversight. But the IMF was looking and issued cautionary reports regarding our economy and the reliance on easy money. It published readily available reports on rising default rates on new mortgages, but noone wanted to stop "the dance".

But AIG ignored all of this and rated MBD as a no risk insurance bet because "noone ever defaults on their own house". And noone was checking to see if AIG had any capital reserves that were actually set aside to back this bet.

Al the while household income had not gone up in decades, but home prices continued to soar. Household savings rate dipped to negative, home equity and household net worth continued to decline, and household debt-to-income rose. All so politicians and the financial community could continue to point to rising GDP and dance.

So now this recession is different than any recent recession because all financial institutions, insurance, pension, and governmental investments can't afford to show their account balances if truely marked to market.

We are in a period where regulators are politically afraid to regulate, and professionals of every stripe throw away their "standards" in pursuit of being part of the party.

Without journalists who will say "I'm mad as hell and I'm not goingto take it anymore -Network" this society and economy is screwed. Without a return to real professional journalism, news and commentary will continue to be little more than a vehicle for corporate and political press releases.

Jan. 29 2013 03:53 PM
Angel from Miami, FL

The biggest contribution from the Baby-boomer generation was "making money from money". The Gordon Geckos have passed this on to Gen-X and Gen-Y business majors who in Michael Bay-style pyrotechnics have taken that paradigm to the umpteenth degree. It no longer matters under which cup the ball is hidden. It's all about the perpetual shuffling of the cups. "Now you see it... now you'll never see it again."

The next "financial crisis" will involve nightly automated trading by computers that will have us wondering how that penny stock we planned on buying yesterday is now worth hundreds before the market opened today.

Jan. 29 2013 09:54 AM
listener

No mention of the Community Reinvestment Act and progressive political interference in the lending industry so the myths continue.

Today we have a "smart economic approach...."?!?!?

Does moral boosting mean now living in an alternative universe where the media is starting to believe their own illusions.

Jan. 29 2013 09:34 AM

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