Monday, October 26, 2020
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Money, Power, and Wall Street: The Financial Collapse

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By March 2008, the prospect of a meltdown was looming. Bear Stearns fell first. It started with rumors about investment in sub-prime mortgages, tagged as toxic assets. Bear Stearns bought hundreds of thousands of sub-prime mortgages and bundled them. Little then did candidate Obama know the role he would play.

This continuation of the Frontline documentary takes up with the events of 2008, a Presidential election year. In this installment, the very foundation of the financial world trembles while we meet the major players: Secretary of the Treasury Hank Paulson, Chairman of the Federal Reserve, Ben Bernanke, and Tim Geithner, president of the Federal Reserve Bank of New York.

Tim Geithner distinguished himself from the moment he received the first panicked call. Instead of acting without intelligence, he dispatched a team to survey the situation at Bear Stearns. They and teams from the SEC and JP Morgan discovered a drowning pool of toxic assets. Bear had made credit default swap deals worth trillions of dollars that had infected all of Wall Street and the financial world. Geither recognized the systemic risk to the world economy. This was the moment of realization that Bear Stearns was too big to fail. This took Federal regulators by surprise.  

McDonnell Ignores Bernanke Advice

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Yesterday, Federal Reserve chief Ben Bernanke warned against cutting government budgets too much while the U.S. economy is still weak and is being stressed by the European debt crisis. At the same time, Bob "I wanna be VP" McDonnell told Virginia state agency heads to develop spending-cut proposals of 2, 4 and 6 percent, anticipating Washington House Republicans cutting funds to states.

McDonnell has been polishing his national "credentials" by lying about Virginia "budget surpluses," phony creations of pension fund borrowing and other accounting gimmicks. Now, he seems to be admitting that lies and tricks won't yield a "surplus" in the next budget. Rather than looking at both sides of the state ledger, revenues and expenditures, he continues the foolish policy for the short term of insisting only on budget cuts that will certainly add stress to Virginia's economy.

Republicans have been in the thrall of an economic lie easy to sell politically ever since Ronald Reagan won the presidency in 1980. That lie is called "supply-side economics," a ridiculous myth that says that if tax rates are lowered, especially for the wealthy, the extra money the rich have will be invested and yield greater revenue for the government. The actual result of the supply-side tax cuts under both Reagan and George W. Bush was to create the largest deficits in U.S. history.

Bernanke is astute enough to know that the real driver of the economic business cycle is the supply-demand curve. When demand for goods goes down because of high unemployment or deep cuts in government budgets, business will not invest but instead will cut back on supply to match the lower demand. McDonnell  and other GOPers can't seem to grasp that simple idea. So, when they rant and rave about slashing government spending right now, they are acting economically crazy. Don't get me wrong. Our long-term structural deficits must be controlled, but slashing government demand for goods and services right now is economic suicide. A more intelligent plan is to let government demand replace part of private demand right now and reserve any deep budget cuts for when the economy has recovered.