A Historic Catastrophe
Forward:
Most of the great man-made disasters in human history all have something in common: they are a convergence of seemingly unrelated events which combine to form a calamity. The teetering near collapse of the world financial markets is just such a calamity. Individually, the events which precipitated the recent finance sector semi-melt-down may have posed serious problems for individual entities, and perhaps had regional impact, but when combined, the result was a viral cascading systemic failure that ripped through the world's financial markets like the great Influenza Pandemic of 1918. Everybody got sick, and all at once.
Before we continue, let us first establish that we are not experts in the matters we are about to discuss. We make no claim that the below is a scholarly treatise on what happened over the course of the last 30 years to set the stage for what has recently transpired. At the TheStupidNation.com, we feel that citizens of a free state have an obligation to invest the time necessary to understand the crucial matters that affect and/or threaten our nation. Without this in-depth understanding, and historical perspective regarding these matters, we cannot possibly make informed decisions about what or whom to oppose or support regarding governance. An ignorant populace threatens the stability, if not the the long-term viability, of a democracy. We believe it is impossible to obtain a meaningful amount of (unbiased) data from any of the mainstream news sources. For-profit "news" enterprises simply can't make money offering the kind of penetrating detailed analysis of complex issues. The advent of the internet, it's awesome capacity to store gargantuan amounts of data, and it's easy access by ordinary people, has provided an alternate source for raw information never before available to individuals. The modern-day challenge - filter through the garbage to find the glittering gems. This is what we have tried to do, and we happily share the results of our research.......
Chapter 1: In The Beginning, God Created Derivatives
To our surprise, we find that the concept of derivatives as a negotiable instrument has been around since antiquity, perhaps as far back as 4,000 years or more. Aristotle tells the tale of astrologer/philosopher Thales of Miletus using his skills to predict a bumper olive harvest for the following year. In advance of the next season, Thales leased all the olive oil presses in the area at a heavy discount, making substantial profits when the olive crop did indeed produce an abundant harvest the next year. Aristotle called this concept - "chrematistics". We recognize it as a classic derivative contract. In simplistic form, a "derivative" is a negotiable instrument whose value is derived at least in part from the value of an underlying tangible asset. The most common and familiar type to derivative contracts we know as Futures and Options contracts. Thales' transaction most closely resembles a futures contract.
Jumping forward a couple thousand years, the modern origins of the financial derivative market can be traced to several foreign currency contracts traded on the Chicago Mercantile Exchange in 1972. The first swap agreements were introduced in 1981. Derivatives can range from simple contracts, to extremely complex hedge instruments. Fundamentally, modern day derivative contracts are basically vehicles to spread/mitigate risk. Derivatives are largely unregulated instruments whose total "notional" value is in the trillions of dollars on any given business day.
Collateralized Debt Obligations (CDO's), a sort of kissing cousin to a derivative instrument, first appeared in 1987 when now defunct Drexel Burnham Lambert issued what is believed to be the first CDO for Imperial Savings Association, a savings and loan that did not survive the S&L collapse of the 1980's. It is ironic that CDO's were born of a junk bond firm that famously collapsed, for a savings and loan bank that also collapsed. Perhaps these were omens that should not have been ignored. However, at the time CDO's seemed like a smart vehicle to spread risk.
Chapter 2: Along comes a Legislator
In our opinion, there is little practical difference between what Americans call a modern "Democrat" and what the dictionary calls a socialist. Yes, there are a couple nuances which Democrats can point to for denial, but that is another post. Democrat William Jefferson Clinton defeated incumbent Republican George H. W. Bush in the 1992 Presidential election. The win for Clinton represented an end of the Reagan conservatism era in the White House, though Clinton was forced to live with it's legacy, and momentum, for the duration of his administration. Clinton benefited from the fruits of Reaganonics, while decrying it's "trickle down" injustices.
One of the multitude of differences between liberalism and conservatism is the classic conservative doctrine of personal empowerment. Liberalism, however, dictates that empowerment flows chiefly from centralized Government. Without the empowerment from central government, the huddled masses of disadvantaged peoples in the United States would never exit their deplorable living conditions. In truth, sustaining liberalism requires a permanent base of ignorant citizens who are professional dependents. Throughout the ebb and tide of liberalism in the United States, and the untold hundreds of billions of tax dollars spent to supposedly raise these huddled masses out of their sorry state, the fact remains that the huddled masses are still there. And liberals cannot explain why. For liberal thinkers, the failure to budge these downtrodden citizens does not represent failure of liberal thought, it just means that the United States hasn't spent enough hundreds of billions. So, if hundreds of billions didn't solve the problem, more hundreds of billions must be spent.
Enter the liberal concept of social engineering, which encompasses the doctrine of wealth re-distribution. Along these lines, in 1994, the Clinton Administration introduced revisions to the Community Reinvestment Act of 1977. These changes were to ensure that lending institutions were “serving low and moderate income geographies” and that they “economically empowered persons of low and moderate income” (to obtain mortgages).
Hence, the "sub-prime" market was born. Well, technically, the sub-prime mortgage market already existed, but banks were not enthusiastic about applicants going this route. However, the revisions to the CRA threatened banks with heavy penalties if they didn't make these types of loans to the people the Clinton Administration wanted to get them. Banks were, in fact, forced to make these sub-prime loans. The sub-prime market exploded after 1994, and banks typically unloaded these loans to Fannie Mae which repackaged these loans leading directly to a concomitant explosion in the CDO and also the SIV (Structured Investment Vehicle - think of them as a virtual, ghost bank) markets.
So, the modern financial derivative market born in the 70's, paved the way for lending institutions to spread the risk of sub-prime mortgages they were compelled to underwrite by a social engineering piece of legislation which directly meddled in the 'free' market.
Chapter 3: Something Wicked This Way Comes
The perception by Islamic Extremists that America was weak has it's roots in the famous 1979 Iranian sacking of the U.S. Embassy in Tehran. America was humiliated day after day during the hostage "crisis". In the middle eastern Islamic male-centric culture where strength is universally respected and weakness universally disdained, America's impotence in dealing with radicalized Iran was marked by those in the Islamic world who burned with insecure hatred and jealousy for all we stood for.
Fast forward to 1983. President Reagan, the tough talking conservative to took on the Soviet Union, and won a dangerous game of 'chicken', was horror stricken when 241 American servicemen died after two suicide truck bombs were driven into a Marine barracks in Beirut. Rather than stand and fight, Reagan had no stomach for suicide terror and quickly abandoned Lebanon to it's bloody religious civil war. Once again, those who hated America duly noted we could be bloodied, and we would run rather than fight.
Somalia 1993: US Armed Forces are in the failed state of Somalia attempting to serve as peace keepers. US Special Forces are drawn into a bloody ambush. Thereafter, President Clinton demonstrates he has no stomach for bloody fighting, and abandons Somalia to it's fate. Those who hate us watch and learn - bloody America's nose, and we will run home.
The stage is now set. America is slumbering. Vague warnings are noted - embassy bombings overseas, and the attack on the warship USS Cole seem far away and remote; the sleepy watch is inadequate to the rising danger.
On September 11, 2001, American gets her next bloody nose. It's on her doorstep this time, a dagger driven into the heart of our financial sector. Thousands die. The economy tanks. Emergency measures are required to get the shocked economy going again. America marches to war.
Chapter 4: A Federal Agency Runs Amok
After September 11th, the US economy briefly seized as Americans were transfixed by the structural and human carnage in New York, Washington DC, and Pennsylvania. The double blow of the bursting of the dotcom bubble, and the precipitous pause in consumer spending was nearly an unprecedented calamity that required quick and aggressive action. Thus, the Federal Reserve Bank, under the direction of it's leader, Alan Greenspan, stepped in and commenced an aggressive campaign of interest rate reductions:
09/17/2001 1/2%
10/02/2001 1/2%
11/06/2001 1/2%
12/11/2001 1/4%
11/06/2002 1/2%
06/25/2003 1/4%
By June of 2003, the Federal funds rate was down to 1%. The cash spigot was now wide open. Mortgage 30 year fixed rates dropped to historic lows.
So, what happens when interest rates drop to historic lows? Well, those already holding mortgages rush to refinance their mortgages to save significantly over the life of the mortgage. Those who couldn't previously afford to buy a house can now afford it. And those who could not afford to buy a larger house can now trade up.
In and amongst all the legitimate refinance activity, and legitimate new first-time 30 year mortgage activity, a frenzy emerged among three key players:
1) Predatory Lenders
2) Predatory Borrowers
3) Incredibly stupid people
To make so much cash available so cheaply in terms of low interest rates - well, what do you think is going to happen? An unnatural feeding frenzy erupts. People diving into the pool head first to get a cheap loan without any consideration to what is going to happen tomorrow. Mortgage firms willing to sign mortgages to anybody - even illegal aliens - to cash in on the frenzy, and the originators - the money baggers - handing off these loans to Fannie Mae, which then dishes these rotten mortgages out to the market in the form of CDO's. Investment firms and banks around the world buy the crap CDO's. In a slight nod to the lenders, it should be noted that the Clinton Administration was pushing for significantly relaxed standard for mortgage eligibility. In fact, during the Clinton Administration, the Federal Reserve pressured banks to accept welfare payments and/or unemployment benefits as includable sources of "income" so that these sub-primers might qualify for a mortgage where otherwise they wouldn't have a prayer. So it is not just predatory lenders here, the Federal Government was duplicitous in lowering the eligibility bar so far that very few people could NOT qualify for a mortgage. It is therefore entirely reasonable and equitable to say that a major contributor to this disaster was government meddling in the free market.
Alan Greenspan, former head of the Federal Reserve bank published a memoir in which he took a stab at self-absolution by claiming the Fed didn't become aware of a problem in the mortgage space until 2006. By then, he claims, there was nothing he could do to stop the madness other than raise interest rates, which the Fed did. Poor Mr. Greenspan might have gotten away with it if he had sounded the alarm at the time he became concerned about what was going on. He didn't, at least not publicly, though he had every opportunity to march off to Capitol Hill and declare irrational exuberance as he did during the dotcom bubble. In short, Greenspan blew it.
Chapter 5: One monster of a mess
The concept of the CDO, and it's derivative cousins back fired. CDO's and those related derivatives were suppose to spread risk around, and insulate institutions from losses, instead had the opposite affect - they spread an infection throughout the financial markets around the globe - dormant, waiting to be triggered by an inevitable tipping interest rate rise. The risk spread was relative slow to build and was diffuse, thus hidden from view. No one - not the Federal Reserve, not the Securities and Exchange Commission, the lenders, the investment banks, Oversight Committees....no one was measuring the growing risk in relation to market whole during the mortgage frenzy. There were warnings from some economists, but we guess their worries were too abstract - the good times were a'rollin' along back then, and thus the dire warnings of "huge risk" were ignored.
So, the introduction of the financial derivative, liberal social engineering to recklessly lower the bar for mortgage eligibility, a terrorist attack which resulted in the Federal Reserve dropping interest rates to historic lows and keeping them too low for too long, all combined into a toxic cocktail that no one was watching for.
This brings us to current events, and the very unpalatable choices before us as a nation. Unfortunately, the pain of financial collapse is greater than the pain of bailing out idiots who took mortgages they couldn't afford, the lending institutions that should never have issued the loans, and the market makers who helped obscure the risk. As messy and uneven as capitalism may be, it is the engine that made the United States the superpower it is today. We hope the lessons learned here are about legislative restraint, proper risk management, and careful conservative oversight of untested negotiable financial instruments.
We hope the lesson here is not that institutions can take huge risks collectively and that the Government will bail their sorry asses out of a jam every time. Indeed these events are extraordinary, and we recognize that extraordinary measures are necessary to prevent true calamity. Since we at theStupidNation.com are in the pool of fiscally responsible Americans - it's really going to suck to help foot the bill for......
The Stupid Nation
COPYRIGHT 2008 TheStupidNation.com All rights reserved
Most of the great man-made disasters in human history all have something in common: they are a convergence of seemingly unrelated events which combine to form a calamity. The teetering near collapse of the world financial markets is just such a calamity. Individually, the events which precipitated the recent finance sector semi-melt-down may have posed serious problems for individual entities, and perhaps had regional impact, but when combined, the result was a viral cascading systemic failure that ripped through the world's financial markets like the great Influenza Pandemic of 1918. Everybody got sick, and all at once.
Before we continue, let us first establish that we are not experts in the matters we are about to discuss. We make no claim that the below is a scholarly treatise on what happened over the course of the last 30 years to set the stage for what has recently transpired. At the TheStupidNation.com, we feel that citizens of a free state have an obligation to invest the time necessary to understand the crucial matters that affect and/or threaten our nation. Without this in-depth understanding, and historical perspective regarding these matters, we cannot possibly make informed decisions about what or whom to oppose or support regarding governance. An ignorant populace threatens the stability, if not the the long-term viability, of a democracy. We believe it is impossible to obtain a meaningful amount of (unbiased) data from any of the mainstream news sources. For-profit "news" enterprises simply can't make money offering the kind of penetrating detailed analysis of complex issues. The advent of the internet, it's awesome capacity to store gargantuan amounts of data, and it's easy access by ordinary people, has provided an alternate source for raw information never before available to individuals. The modern-day challenge - filter through the garbage to find the glittering gems. This is what we have tried to do, and we happily share the results of our research.......
Chapter 1: In The Beginning, God Created Derivatives
To our surprise, we find that the concept of derivatives as a negotiable instrument has been around since antiquity, perhaps as far back as 4,000 years or more. Aristotle tells the tale of astrologer/philosopher Thales of Miletus using his skills to predict a bumper olive harvest for the following year. In advance of the next season, Thales leased all the olive oil presses in the area at a heavy discount, making substantial profits when the olive crop did indeed produce an abundant harvest the next year. Aristotle called this concept - "chrematistics". We recognize it as a classic derivative contract. In simplistic form, a "derivative" is a negotiable instrument whose value is derived at least in part from the value of an underlying tangible asset. The most common and familiar type to derivative contracts we know as Futures and Options contracts. Thales' transaction most closely resembles a futures contract.
Jumping forward a couple thousand years, the modern origins of the financial derivative market can be traced to several foreign currency contracts traded on the Chicago Mercantile Exchange in 1972. The first swap agreements were introduced in 1981. Derivatives can range from simple contracts, to extremely complex hedge instruments. Fundamentally, modern day derivative contracts are basically vehicles to spread/mitigate risk. Derivatives are largely unregulated instruments whose total "notional" value is in the trillions of dollars on any given business day.
Collateralized Debt Obligations (CDO's), a sort of kissing cousin to a derivative instrument, first appeared in 1987 when now defunct Drexel Burnham Lambert issued what is believed to be the first CDO for Imperial Savings Association, a savings and loan that did not survive the S&L collapse of the 1980's. It is ironic that CDO's were born of a junk bond firm that famously collapsed, for a savings and loan bank that also collapsed. Perhaps these were omens that should not have been ignored. However, at the time CDO's seemed like a smart vehicle to spread risk.
Chapter 2: Along comes a Legislator
In our opinion, there is little practical difference between what Americans call a modern "Democrat" and what the dictionary calls a socialist. Yes, there are a couple nuances which Democrats can point to for denial, but that is another post. Democrat William Jefferson Clinton defeated incumbent Republican George H. W. Bush in the 1992 Presidential election. The win for Clinton represented an end of the Reagan conservatism era in the White House, though Clinton was forced to live with it's legacy, and momentum, for the duration of his administration. Clinton benefited from the fruits of Reaganonics, while decrying it's "trickle down" injustices.
One of the multitude of differences between liberalism and conservatism is the classic conservative doctrine of personal empowerment. Liberalism, however, dictates that empowerment flows chiefly from centralized Government. Without the empowerment from central government, the huddled masses of disadvantaged peoples in the United States would never exit their deplorable living conditions. In truth, sustaining liberalism requires a permanent base of ignorant citizens who are professional dependents. Throughout the ebb and tide of liberalism in the United States, and the untold hundreds of billions of tax dollars spent to supposedly raise these huddled masses out of their sorry state, the fact remains that the huddled masses are still there. And liberals cannot explain why. For liberal thinkers, the failure to budge these downtrodden citizens does not represent failure of liberal thought, it just means that the United States hasn't spent enough hundreds of billions. So, if hundreds of billions didn't solve the problem, more hundreds of billions must be spent.
Enter the liberal concept of social engineering, which encompasses the doctrine of wealth re-distribution. Along these lines, in 1994, the Clinton Administration introduced revisions to the Community Reinvestment Act of 1977. These changes were to ensure that lending institutions were “serving low and moderate income geographies” and that they “economically empowered persons of low and moderate income” (to obtain mortgages).
Hence, the "sub-prime" market was born. Well, technically, the sub-prime mortgage market already existed, but banks were not enthusiastic about applicants going this route. However, the revisions to the CRA threatened banks with heavy penalties if they didn't make these types of loans to the people the Clinton Administration wanted to get them. Banks were, in fact, forced to make these sub-prime loans. The sub-prime market exploded after 1994, and banks typically unloaded these loans to Fannie Mae which repackaged these loans leading directly to a concomitant explosion in the CDO and also the SIV (Structured Investment Vehicle - think of them as a virtual, ghost bank) markets.
So, the modern financial derivative market born in the 70's, paved the way for lending institutions to spread the risk of sub-prime mortgages they were compelled to underwrite by a social engineering piece of legislation which directly meddled in the 'free' market.
Chapter 3: Something Wicked This Way Comes
The perception by Islamic Extremists that America was weak has it's roots in the famous 1979 Iranian sacking of the U.S. Embassy in Tehran. America was humiliated day after day during the hostage "crisis". In the middle eastern Islamic male-centric culture where strength is universally respected and weakness universally disdained, America's impotence in dealing with radicalized Iran was marked by those in the Islamic world who burned with insecure hatred and jealousy for all we stood for.
Fast forward to 1983. President Reagan, the tough talking conservative to took on the Soviet Union, and won a dangerous game of 'chicken', was horror stricken when 241 American servicemen died after two suicide truck bombs were driven into a Marine barracks in Beirut. Rather than stand and fight, Reagan had no stomach for suicide terror and quickly abandoned Lebanon to it's bloody religious civil war. Once again, those who hated America duly noted we could be bloodied, and we would run rather than fight.
Somalia 1993: US Armed Forces are in the failed state of Somalia attempting to serve as peace keepers. US Special Forces are drawn into a bloody ambush. Thereafter, President Clinton demonstrates he has no stomach for bloody fighting, and abandons Somalia to it's fate. Those who hate us watch and learn - bloody America's nose, and we will run home.
The stage is now set. America is slumbering. Vague warnings are noted - embassy bombings overseas, and the attack on the warship USS Cole seem far away and remote; the sleepy watch is inadequate to the rising danger.
On September 11, 2001, American gets her next bloody nose. It's on her doorstep this time, a dagger driven into the heart of our financial sector. Thousands die. The economy tanks. Emergency measures are required to get the shocked economy going again. America marches to war.
Chapter 4: A Federal Agency Runs Amok
After September 11th, the US economy briefly seized as Americans were transfixed by the structural and human carnage in New York, Washington DC, and Pennsylvania. The double blow of the bursting of the dotcom bubble, and the precipitous pause in consumer spending was nearly an unprecedented calamity that required quick and aggressive action. Thus, the Federal Reserve Bank, under the direction of it's leader, Alan Greenspan, stepped in and commenced an aggressive campaign of interest rate reductions:
09/17/2001 1/2%
10/02/2001 1/2%
11/06/2001 1/2%
12/11/2001 1/4%
11/06/2002 1/2%
06/25/2003 1/4%
By June of 2003, the Federal funds rate was down to 1%. The cash spigot was now wide open. Mortgage 30 year fixed rates dropped to historic lows.
So, what happens when interest rates drop to historic lows? Well, those already holding mortgages rush to refinance their mortgages to save significantly over the life of the mortgage. Those who couldn't previously afford to buy a house can now afford it. And those who could not afford to buy a larger house can now trade up.
In and amongst all the legitimate refinance activity, and legitimate new first-time 30 year mortgage activity, a frenzy emerged among three key players:
1) Predatory Lenders
2) Predatory Borrowers
3) Incredibly stupid people
To make so much cash available so cheaply in terms of low interest rates - well, what do you think is going to happen? An unnatural feeding frenzy erupts. People diving into the pool head first to get a cheap loan without any consideration to what is going to happen tomorrow. Mortgage firms willing to sign mortgages to anybody - even illegal aliens - to cash in on the frenzy, and the originators - the money baggers - handing off these loans to Fannie Mae, which then dishes these rotten mortgages out to the market in the form of CDO's. Investment firms and banks around the world buy the crap CDO's. In a slight nod to the lenders, it should be noted that the Clinton Administration was pushing for significantly relaxed standard for mortgage eligibility. In fact, during the Clinton Administration, the Federal Reserve pressured banks to accept welfare payments and/or unemployment benefits as includable sources of "income" so that these sub-primers might qualify for a mortgage where otherwise they wouldn't have a prayer. So it is not just predatory lenders here, the Federal Government was duplicitous in lowering the eligibility bar so far that very few people could NOT qualify for a mortgage. It is therefore entirely reasonable and equitable to say that a major contributor to this disaster was government meddling in the free market.
Alan Greenspan, former head of the Federal Reserve bank published a memoir in which he took a stab at self-absolution by claiming the Fed didn't become aware of a problem in the mortgage space until 2006. By then, he claims, there was nothing he could do to stop the madness other than raise interest rates, which the Fed did. Poor Mr. Greenspan might have gotten away with it if he had sounded the alarm at the time he became concerned about what was going on. He didn't, at least not publicly, though he had every opportunity to march off to Capitol Hill and declare irrational exuberance as he did during the dotcom bubble. In short, Greenspan blew it.
Chapter 5: One monster of a mess
The concept of the CDO, and it's derivative cousins back fired. CDO's and those related derivatives were suppose to spread risk around, and insulate institutions from losses, instead had the opposite affect - they spread an infection throughout the financial markets around the globe - dormant, waiting to be triggered by an inevitable tipping interest rate rise. The risk spread was relative slow to build and was diffuse, thus hidden from view. No one - not the Federal Reserve, not the Securities and Exchange Commission, the lenders, the investment banks, Oversight Committees....no one was measuring the growing risk in relation to market whole during the mortgage frenzy. There were warnings from some economists, but we guess their worries were too abstract - the good times were a'rollin' along back then, and thus the dire warnings of "huge risk" were ignored.
So, the introduction of the financial derivative, liberal social engineering to recklessly lower the bar for mortgage eligibility, a terrorist attack which resulted in the Federal Reserve dropping interest rates to historic lows and keeping them too low for too long, all combined into a toxic cocktail that no one was watching for.
This brings us to current events, and the very unpalatable choices before us as a nation. Unfortunately, the pain of financial collapse is greater than the pain of bailing out idiots who took mortgages they couldn't afford, the lending institutions that should never have issued the loans, and the market makers who helped obscure the risk. As messy and uneven as capitalism may be, it is the engine that made the United States the superpower it is today. We hope the lessons learned here are about legislative restraint, proper risk management, and careful conservative oversight of untested negotiable financial instruments.
We hope the lesson here is not that institutions can take huge risks collectively and that the Government will bail their sorry asses out of a jam every time. Indeed these events are extraordinary, and we recognize that extraordinary measures are necessary to prevent true calamity. Since we at theStupidNation.com are in the pool of fiscally responsible Americans - it's really going to suck to help foot the bill for......
The Stupid Nation
COPYRIGHT 2008 TheStupidNation.com All rights reserved
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