Big banks on track to take down U.S.A. Inc.?

Keep reading stuff like this, A Year After a Cataclysm, Little Change on Wall St.:

Simon Johnson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology and former chief economist of the International Monetary Fund, said that the seeds of another collapse had already sprouted. If major banks are allowed to keep making bets that are ultimately backed by taxpayer guarantees, they will return to the practices that led them to underwrite trillions of dollars in bad loans, Professor Johnson said.

This isn't really an ideological issue. Arnold Kling (who opposed the bailout) has been beating the drums on this issue for a year now. Rather, it is a "stakeholder" vs. non-stakeholder issue. It's a sign of our institutional sclerosis than the majority seem to agree that there are untenable systemic risks baked into the cake of our current financial-political complex, but the majority also rate the chance of mitigating the risk through regulation low. Perhaps the best sign of the lack of change is that employment in the finance sector has declined just 8 percent since last fall. We're in the full bloom of crony capitalism climax ecosystem.

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I'm still not seeing anyone report on the reality of why the collapse happened. Why it happened to the US and a few countries with similar regulations (or lack thereof) and why it did not happen in Canada.

The financial collapse was due almost entirely to the banks intentionally issuing mortgages to people they knew could not pay for them.

They did this intentionally to be able to foreclose on houses, and sell them again at a higher price in the hot market. ... a hot market kept hot by the banks ever freer lending. The entire system was setup to steal houses away from homeowners, and those who should have only been renters.

The banks failed to stop their scheme before it became unsustainable, and had to intentionally make the problem so bad that if the government didn't bail them out it would have brought down everything (a far worse collapse than what happened).

I'm nobody ... but I saw this coming over a year before the crash. during that year I happened to speak to a young banker who was actually in awe of the pricks who put the scheme into effect, who was on his way to a conference where he could learn from the criminals!

He should have been headed to the conference with a machine gun in hand to fix your problem ... but he was getting in on the 'screw america' plan for his own benefit.

the 'majority' you speak of is irrelevant. In Canada, banks can not give mortgages to people who can't afford them. Income must be proven. Minimum downpayments must be made. There are NO 'NINJA' (No Income No Job Applicants) mortgages, like what your bankers ached to hand out.

Here, 5% is the general minimum downpayment, but if you put down less than 25% you must pay an extra mortgage insurance fee which amounts to several hundred dollars per month on your payment.

And guess what!

It works! NO Canadian bank failed when you dumbass americans self destructed.

But we've still been hurt by your dumbass american ways. After 12 years of a federal surplus the damage you caused to our economy has put us into record deficits.

Gee. Thanks America. But at least now i can run across the border and by a great house with a great view from one of your bankrupted citizens for next to nothing.

When a "too big to fail" institution or system fails, the trend has been to keep passing the buck up the line. The problem is that eventually you reach the end of the line. Uncle Sam is the biggest there is, and when he fails... well, it scarcely bears thinking about.

But fail he will. No one serious disputes that we'll have anything other than trillion-dollar deficits as far as the eye can see, and no one with even a passing acquaintance with the numbers pretends the gap can be plugged with tax or military cuts. Add to that the $2e12 public pension underfunding crisis burbling under the surface and we're staring down the barrel of the biggest failure there is, with no possible bailout.

Apologies if I sound like a nut, but I'm pretty sure that (in the words of a wise man), we are doomed, doomed.

There might be a bit more personal risk than they think: Judge Lynch never sleeps.

I do not understand why laws haven't already been passed to break them up. It's not that Goldman Sachs, for example, necessarily has to be viewed as *bad*: one can view them as immensely successful and admirable in the degree that they have adapted to the current regulatory and financial climate and have thereby grown huge. However, the fact that they and others are now too big to fail is in itself dangerous to the country's economic system. We ban things all the time just because they are dangerous; it isn't punishment and it doesn't mean they are immoral. Financial institutions this large have to be broken up between specialties (a la Glass-Steagall) and simply for size. The increased competition between smaller and more specialized companies may also produce beneficial innovations.

By Break them up! (not verified) on 12 Sep 2009 #permalink

"We're in the full bloom of crony capitalism climax ecosystem." The predators will perish when the supply of prey is exhausted.

By bioIgnoramus (not verified) on 13 Sep 2009 #permalink

This seems to be not so much a liberal/conservative divide as an insider/outsider. There are wings of both the liberal and conservative movements that are deeply suspicious of wall Street, corporations, big finance and the like.

Unfortunately the political classes of both parties are insiders, so we can expect little substantive change, they have too much to lose in money and power by reining in the excesses.

What is interesting to me is the divergent rationales, the talking points, each side uses when talking to their constituents, so very distinct yet ending up in the same place.

Looks like we are ripe for a new wave of 'throw the bums out' elections. I am not terribly hopeful that the replacements will be much of an improvement.

Sing it far and wide!

The people capable of making change - and neglect to do so - MUST be held responsible, because otherwise change will never happen!

Obviously! But there are still better ways of holding people responsible than letting the banking system fail. Like docking their pay, or at the very least NOT PAYING THEM BONUSES FOR EFFING UP!