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

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.  

Money, Power, and Wall Street: an Invisible Market

The myth of a strong economy heralded by the Bush administration unraveled in a series of Wall Street financial earthquakes. $11 trillion of America's net worth dissolved; 8.5 million jobs were lost in the resulting recession. People's homes weren't worth what they paid for them. College graduates moved home.

"The real story of this financial crisis is not so much whether the bailout was the right thing or the wrong thing to do. The real question is: How did it come to be?" - Phil Angelides, Chair, Financial Crisis Inquiry Committee

This beginning of a PBS Frontline documentary depicts the dramatic succession of events that led to and through the financial cataclysm that altered the economic landscape. In the first installment, events leading up to the 2008 crisis are brought into focus. Some of the key players are introduced. Most important is the development of a financial layman's understanding of the complex machinations involved.

It didn't begin with credit default obligations (CDOs) but that is as good a place as any to start explaining this mess. A group of innovators at JP Morgan developed the concept of a derivative to trade loan risks in the early 1990s. That is where the Frontline documentary begins the journey through a sorry tale of a failed economic credo and its victims.  

Get Ready For a Push to Return to the Gold Standard

At first it was only Ron Paul (R, TX), the fringe libertarian Congressman who talked seriously about a return to the gold standard. Since the Wall Street meltdown and the Great Recession, however, we have heard a growing chorus of politicians (mostly right-wing), and conservative economists floating the idea of a return to the gold standard as the solution to rising federal deficits and the jobless recovery. Various bigwigs like World Bank President Robert Zoelick, Warren Buffet's father Howard Buffet, and Kansas Federal Reserve President Thomas Hoenig all have made statements supporting a return to the gold standard, but nothing has been so remarkable as hearing Alan Greenspan, in an interview on Fox Business, say:
We have at this particular stage a fiat currency which is essentially money printed by a government and it's usually a central bank which is authorized to do so.  Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that all of history suggest that inflation will take hold with very deleterious effects on economic activity... There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard.

Even more stunning was hearing Greenspan question whether or not we even need a central bank (i.e., the Federal Reserve); he also claimed that the housing bubble was not his fault, if anything, it was "the Fed's," as if he himself was not really "the Fed" at the time.  

Monkey-face Throws a Monkey Wrench

Just as the President's commission on government debt gets going, and showing a suspicious co-ordination with the growing Republican-Wall Street campaign to curtail federal debt and wring more money from Main Street in preference to mounting a new attack to stimulate job growth, up pops Alan Greenspan with another piece of sage advice.  According to Bloomberg the former Federal Reserve Chair (1987-2006) testified at a Financial Crisis Inquiry Commission in Washington, that the U.S. may soon face higher borrowing costs (i.e., interest payments) on its "swelling debt." Bloomberg also quoted from Greenspan's own article in The Wall Street Journal, where he stated
"The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy... the federal government is currently saddled with commitments for the next three decades that it will be unable to meet in real terms.... (the) very severity of the pending crisis and growing analogies to Greece set the stage for a serious response."