Bankers gone wild is his catch phrase for the financial instruments that led to the bursting of the financial,housing bubble and the collapse of the economy. As late as 2005,Alan Greenspan stated that complex financial instruments have contributed to the development of a far more flexible,efficient, and hence resilient financial system than the one that existed just a quarter century ago. The innovations Greenspan adored brought the financial system to the brink of collapse. Asset-backed securities, collateralized loan obligations and credit default swaps all contributed to the collapse by encouraging reckless lending, slicing bad debt(with the help of debt rating companies),and insuring bad debt(AIG) without the money to pay for losses.The bailout cost $4.6 trillion.
Step by step, the rules and regulations that had been put in place in the 1930's to protect against a banking crises were dismantled and by 2008, the capital backing for banks were only a few percent of their assets and small losses could break them.Glass-Steagall Act of 1933 limited the amount of risk a bank could take.It was repealed by the Gramm-Leach-Blilely Act in 1999 .It repealed part of the Glass-Steagall Act of 1933, removing barriers in the market among banking companies, securities companies and insurance companies that prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and an insurance company. With the passage of the Gramm–Leach–Bliley Act, commercial banks, investment banks, securities firms, and insurance companies were allowed to consolidate. The legislation was signed into law by President Bill Clinton. Citicorp and Travelers merger joined investments with insurance to form Citigroup shortly after the bill was signed. Previously,the Monetary Control Act of 1980 ended the regulations preventing banks from paying interest on many kinds of deposits. Under Reagan, The Garn-St.Germain Act of 1982 relaxed restrictions on the kinds of loans banks could make and encouraged risk taking..survival of the most reckless ensued.There was no limits on interest rates or loans to customers that might not honor their promises.Banks financed their leading by borrowing from other banks. A "shadow banking" system developed that is bigger than the old-fashioned banking we knew before deregulation that was highly leveraged without regulation that could take even larger risks(Lehman Brothers).Money dominated the political system when all the deregulation began and continues to this day.
After the collapse,the right blamed the Community Reinvestment Act of 1977 on the crises.This lie blamed the poor instead of the banks with their risk taking.The bubble was widespread and the biggest booms and busts were in the suburbs and exurbs rather than the inner-city owners. There was a similar housing crises in Europe with no Reinvestment Act. Commercial real estate on both continents defaulted. The risk taking was primarily done by private lenders. Subprime loans were made overwhelmingly by private firms that were not covered by the Community Reinvestment Act,nor supervised by Fannie Mae and Freddie Mac. In fact, Fannie/Freddie were losing market share because private lenders would take on borrowers the government sponsored agencies wouldn't. Fannie and Freddie did buy subprime mortgages from loan originators but it was late in the game.
Krugman feels we have to fund state and local governments by $300 billion to bring back the half a million jobs that were lost and employ a total of 1.3 million state and local workers.The austerity measures hinder the recovery and diminishes consumer spending. There should be a restarting of all projects that were postponed or cancelled by state and federal governments. An increase in the safety net programs and unemployment insurance should also start as soon as possible.The Federal Reserve should let inflation grow modestly higher to 4% for the next five years and buy "unconventional" assets like long term bonds and private debts.The Fed could also keep interest rates on ten year bonds below 2.5% for five years while intervene on the Foreign Exchange Market to push down the value of the currency that would strengthen the export sector. He wants homeowners to have the chance to refinance their home debt to below 4% and sees the Home Affordable Refinance Program as too restrictive. The U.S should get tougher on China's manipulation of the currency and create incentives for business to upgrade their emission of greenhouse gases by announcing stricter targets.
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