It’s been decades since we’ve been there and high time we took it seriously. Job one is a thorough housecleaning and new direction, much like what’s described below.
On April 3, Black appeared on Bill Moyers Journal on PBS and explained what’s briefly enumerated below. From his experience as a regulator and prosecutor, he said:
- Fraud is initiated in boardrooms and CEO offices by making “really bad loans, because they pay better”;
- Growth is based on “a Ponzi-like scheme”, multiplied through leverage. It’s hugely profitable early on, then inevitably creates “disaster down the road”;
- Dismantling regulation makes it possible;
- One scheme was subprime, called “Alt-A”, or “liars’ loans”, meaning no checks are made on income, jobs, ability to repay, and the more they’re inflated the more profitable they are. The amount of them was enormous – for one company alone, they generated as many losses as the entire S & L scandal;
- Toxic products were willfully created to scam borrowers for big profits;
- Rating agencies went along by appraising junk as AAA instead of doing it honestly;
- In September 2004, the FBI warned about a mortgage fraud epidemic, but nothing was done to stop it, so now we have a crisis hundreds of times greater than the S & L one and bad policy in play to address it;
- As in Barrons, he accused top Bush and Obama officials of a cover-up to conceal the insolvency of all major banks and by so doing broke the law established after the S & L crisis, the Prompt Corrective Action Law that mandates insolvent banks be shut down and/or placed in receivership; and
- This is the greatest financial scandal in history – swept under the rug by top government officials of both parties. It’s legally and morally indefensible, and it’s wrecking the country.
In another interview, Black calls ongoing stress tests “a complete sham” done “to fool people” and “make us chumps”. It’s part of the giant cover-up and greatest ever criminal fraud by bankers and complicit government officials.
In an April 13 piece, Nouriel Roubini shared Black’s view. He cited the stress test “spin machine” leaking stories to the press that all 19 banks in question will pass. None will fail. If more “exceptional assistance” is needed, Washington will provide it.
However, Q1 macro data tells another story as growth, unemployment, and falling home prices alone “are already worse than those in U.S. government baseline scenario for 2009 AND even worse than those for the more adverse stressed scenario for 2009. Thus, the stress test results are meaningless as actual data are already running worse than the worst case scenario.”
In other words, test results “are not worth the paper they are written on” as their assumptions are fraudulently based. They’re a “fudge test”, blatantly rigged to put a brave face on a very bleak economic picture.
They’re in addition to other changes, including the recent Financial Accounting Standards Board (FASB) ruling. It’s responsible for developing “generally accepted accounting principles”, or GAAP. On April 3, it changed so-called “mark-to-market” standards to “mark-to-make believe” ones. It also voted to allow banks to book smaller impaired asset losses to paint a brighter profits picture. It let Wells Fargo, for example, claim a Q1 profit when it’s drowning in losses, ones it can hide and not take.
Also likely coming is restoration of the “uptick rule” that prohibited short-selling in a down market. Established in 1938 to prevent disorderly selling, it allows shorts only when shares trade up. In June 2007, it was removed. Re-introductory proposals are now being considered to artificially boost prices.
Roubini calls it “a form of legalized manipulation of the stock market by regulators that are trying to prevent short-sellers to do their job, i.e. make stock prices reflect fundamentals and prevent bubbles in stock prices”.
Overall, alarm bells should be warning about reckless monetary and fiscal policies, but perverse market reaction was relief that’s wildly premature according to some like Roubini. Others see a protracted downturn, a prolonged winter, and if conditions deteriorate enough perhaps a nuclear one, unlike anything before seen. And why not?
- World economies are plummeting at depression-level speed by all key measures: production, consumption, trade, profits, asset values, capital flows, and more;
- Unemployment is soaring: in the U.S. close to 20% with all excluded and understated categories included;
- Pensions have been lost along with benefits;
- Homelessness is rising sharply, the result of over six million foreclosures; tent cities are appearing across the country;
- Recent data shows soaring foreclosures up 24% in Q 1 2009; in March alone, 46% higher than a year earlier – alone providing clear evidence of serious trouble; and
- Desperation is fueling anger and despair as conditions keep deteriorating absent sound policies to address them.
On April 6, Professor Vernon Smith (a 2002 economics Nobel laureate) and research associate Steven Gjerstad headlined a Wall Street Journal op-ed: “From Bubble to Depression?” They asked: What creates bubbles? Why does a large one, like the dot.com bubble, do no damage to the financial system while another, housing, caused collapse?
They believe “events of the past 10 years have an eerie similarity to the period leading up to the Great Depression”, including rising mortgage debt and speculation.
Had banking system difficulties “been caused by losses on brokers’ loans for margin purchases in 1929, the results should have been felt in the banks immediately after the stock market crash.” But they weren’t apparent until fall 1930, a year later.
Further, if money supply contraction caused bank failures, why haven’t massive infusions today prevented the crisis? They conclude that conventional wisdom needs reassessing and believe “excessive consumer debt – especially mortgage debt – was transmitted into the financial sector” causing the Great Depression.
Their hypothesis “is that a financial crisis originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we’re witnessing the second great consumer debt crash, the end of a massive consumption binge.” They want further study to test the theory.
However, much more than that is needed: real reform, a complete reversal from current policy of the kind addressed below. Also, Smith and Gjerstad omitted a crucial fact – how misdirected today’s massive infusions have been. Instead of helping beleaguered households, they’ve gone mostly to bankers for purposes other than economic recovery; namely, recapitalizations, for acquisitions, and big bonuses at the same time they fire thousands of lower level staff.