Krugman doesn’t understand the 2008 Financial Crisis…

Author: Dan Wright
Friday, April 08, 2016  1:37 PM

Nobel-prize winning economist and New York Times columnist Paul Krugman does not understand the 2008 financial crisis. How this occurred is a mystery, given Krugman clearly has access to all the available information and analysis that has led many observers to correctly comprehend what happened.

In a recent column primarily concerned with perceived deficiencies of presidential candidate Senator Bernie Sander’s campaign messaging, Krugman offered a thoroughly incorrect analysis of the 2008 financial crisis:

The easy slogan here is “Break up the big banks.” It’s obvious why this slogan is appealing from a political point of view: Wall Street supplies an excellent cast of villains. But were big banks really at the heart of the financial crisis, and would breaking them up protect us from future crises?

Many analysts concluded years ago that the answers to both questions were no. Predatory lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial; the crisis itself was centered not on big banks but on “shadow banks” like Lehman Brothers that weren’t necessarily that big. And the financial reform that President Obama signed in 2010 made a real effort to address these problems. It could and should be made stronger, but pounding the table about big banks misses the point.

Absolutely wrong. The Too Big To Fail banks were undeniably at the heart of the financial crisis. While it is true that mortgage origination firms like Countrywide played a major role, they alone could not have created financial crisis without working hand-in-hand with the “big banks.”

The big banks were, after all, who Countrywide and others were ultimately selling those bad loans to. But more than that. The big banks took the mortgage-backed securities (MBS) and sold them throughout the world, laying down ordnance that would explode in 2008 and rock the markets to their cores.

And, to make the point even clearer, the big banks not only seeded time bombs throughout the global financial system, but knew they were doing so. That claim, which began as speculation early-on in the crisis and has been conclusively proven over the last eight years, led to record-setting multi-billion dollar settlements by the big banks.

To give one smoking gun example, former JPMorgan compliance officer Alayne Fleischmann provided eye witness testimony to the Department of Justice that, while working in the compliance department of JPMorgan, she saw JPMorgan executives engage in securities fraud by relabeling and mislabeling MBS products that were then sold to unwitting clients. Not long after, those securities blew up in those clients faces.

Partly as a result of Fleischmann’s expert eye-witness testimony, JPMorgan Chase & Co. agreed to pay a record $13 billion settlement to “resolve federal and state civil claims arising out of the packaging, marketing, sale and issuance of residential mortgage-backed securities (RMBS).” The settlement included an admission that JPMorgan made “serious misrepresentations to the public – including the investing public – about numerous RMBS transactions.”

OK, so just one of the “big banks?” No. Every one of the big banks paid massive fines for their involvement in triggering the 2008 financial crisis. In some cases, those settlements included crimes committed by mortgage originators such as Countrywide (Bank of America), but a reading of the settlement documents makes it undeniably plain that the originators were just one part of the larger chain of fraud that led to the 2008 meltdown.

Goldman Sachs paid $5.1 billion to resolve investigations “relating to the firm’s securitization, underwriting and sale of residential mortgage-backed securities from 2005 to 2007.”

Citigroup paid $7 billion for its role in the 2008 crisis, which included an admission that “Citigroup acknowledged it made serious misrepresentations to the public – including the investing public – about the mortgage loans it securitized in RMBS.”

Bank of America paid $16.65 billion to “settle several of the department’s ongoing civil investigations related to the packaging, marketing, sale, arrangement, structuring and issuance of RMBS, collateralized debt obligations (CDOs), and the bank’s practices concerning the underwriting and origination of mortgage loans.” That settlement included Countrywide and Merrill Lynch.

So, yes, the big banks were at the heart of the crisis–a claim both made by the government and conceded by the big banks themselves via the payment of large settlements.

And it was the largeness of the banks, only possible through deregulation passed by Congress and signed by President Bill Clinton, that made them systemically important and “Too Big To Fail.” That dynamic led policymakers to bail out those banks, and continues to ensure that, if the big banks are not broken up, there will be future bailouts.

That “shadow banking” was the only or even primary culprit is simply not true, as has been pointed out by the Financial Crisis Inquiry Commission and numerous others.

Sorry Paul, but those are the facts. That an economist could be so misinformed (if not disingenuous) on such a vital economic issue is extremely disappointing.

—-(and here is Krugman’s article—-

Sanders Over the Edge

via N.Y. Times Op-Ed by Paul Krugman APRIL 8, 2016

From the beginning, many and probably most liberal policy wonks were skeptical about Bernie Sanders. On many major issues — including the signature issues of his campaign, especially financial reform — he seemed to go for easy slogans over hard thinking. And his political theory of change, his waving away of limits, seemed utterly unrealistic.

Some Sanders supporters responded angrily when these concerns were raised, immediately accusing anyone expressing doubts about their hero of being corrupt if not actually criminal. But intolerance and cultishness from some of a candidate’s supporters are one thing; what about the candidate himself?

Unfortunately, in the past few days the answer has become all too clear: Mr. Sanders is starting to sound like his worst followers. Bernie is becoming a Bernie Bro.

Let me illustrate the point about issues by talking about bank reform.

The easy slogan here is “Break up the big banks.” It’s obvious why this slogan is appealing from a political point of view: Wall Street supplies an excellent cast of villains. But were big banks really at the heart of the financial crisis, and would breaking them up protect us from future crises?

Many analysts concluded years ago that the answers to both questions were no. Predatory lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial; the crisis itself was centered not on big banks but on “shadow banks” like Lehman Brothers that weren’t necessarily that big. And the financial reform that President Obama signed in 2010 made a real effort to address these problems. It could and should be made stronger, but pounding the table about big banks misses the point.

Yet going on about big banks is pretty much all Mr. Sanders has done. On the rare occasions on which he was asked for more detail, he didn’t seem to have anything more to offer. And this absence of substance beyond the slogans seems to be true of his positions across the board.

You could argue that policy details are unimportant as long as a politician has the right values and character. As it happens, I don’t agree. For one thing, a politician’s policy specifics are often a very important clue to his or her true character — I warned about George W. Bush’s mendacity back when most journalists were still portraying him as a bluff, honest fellow, because I actually looked at his tax proposals. For another, I consider a commitment to facing hard choices as opposed to taking the easy way out an important value in itself.

But in any case, the way Mr. Sanders is now campaigning raises serious character and values issues.

It’s one thing for the Sanders campaign to point to Hillary Clinton’s Wall Street connections, which are real, although the question should be whether they have distorted her positions, a case the campaign has never even tried to make. But recent attacks on Mrs. Clinton as a tool of the fossil fuel industry are just plain dishonest, and speak of a campaign that has lost its ethical moorings.

And then there was Wednesday’s rant about how Mrs. Clinton is not “qualified” to be president.

What probably set that off was a recent interview of Mr. Sanders by The Daily News, in which he repeatedly seemed unable to respond when pressed to go beyond his usual slogans. Mrs. Clinton, asked about that interview, was careful in her choice of words, suggesting that “he hadn’t done his homework.”

But Mr. Sanders wasn’t careful at all, declaring that what he considers Mrs. Clinton’s past sins, including her support for trade agreements and her vote to authorize the Iraq war — for which she has apologized — make her totally unfit for office.

This is really bad, on two levels. Holding people accountable for their past is O.K., but imposing a standard of purity, in which any compromise or misstep makes you the moral equivalent of the bad guys, isn’t. Abraham Lincoln didn’t meet that standard; neither did F.D.R. Nor, for that matter, has Bernie Sanders (think guns).

And the timing of the Sanders rant was truly astonishing. Given her large lead in delegates — based largely on the support of African-American voters, who respond to her pragmatism because history tells them to distrust extravagant promises — Mrs. Clinton is the strong favorite for the Democratic nomination.

Is Mr. Sanders positioning himself to join the “Bernie or bust” crowd, walking away if he can’t pull off an extraordinary upset, and possibly helping put Donald Trump or Ted Cruz in the White House? If not, what does he think he’s doing?

The Sanders campaign has brought out a lot of idealism and energy that the progressive movement needs. It has also, however, brought out a streak of petulant self-righteousness among some supporters. Has it brought out that streak in the candidate, too?

The post Paul Krugman Doesn’t Understand The 2008 Financial Crisis appeared first on Shadowproof.

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