Tuesday, March 22, 2011

The Inside Job

Recently watched the documentary "The Inside Job", a chillingly effective and analytical look at the causes of the Financial Crisis. It is narrated by Matt Damon, who also acts as interviewer to those people of influence who were happy enough (or foolish enough) to want to be interviewed.

"The Inside Job" sets out in clear details the root causes for the Financial Crisis, and lays out in no uncertain terms essentially how amoral, all-powerful and corrupt the financial sector that controls the world's money truly is.
For those who think that to say "the banks and money men run everything" is a statement of a conspiracy-theorist, watching this film will show you how sadly correct much of that paranoia really is based on fact.

The Financial Crisis was not an accident. It was not inevitable.

It happened because thirty years ago the governments of the Anglo-Saxon world (Ronald Reagan in particular), threw away the rules that had protected the banking industry from carrying out the same amoral and reckless behaviour that had caused the Great Depression.
It happened because Ronald Reagan was a willing disciple to the views the the banking sector, who felt they had been constrained for too long by those same rules that had protected the economy from the irresponsibility of the banks.
In 1979, for example, the big banks of the USA (Morgan Stanley, Goldman Sachs etc.) had a modest number of staff, on a modest wage. There was the example of one broker who actually had two jobs in order to make a suitable income for his wife and children. Due to the throwing out of the rules restricted the banks, ten years later that same broker would be a millionaire. Those banks now have a staff many times higher than they had thirty years ago.

But even that deregulation did not mean that banks could not be regulated in other ways. In the financial industry, there are what are called Ratings Agencies: these give values to the assets that banks have when trading. Attempts to regulate the banks in other ways during the Clinton administration fell on deaf ears, and by that point the banks had long had sufficient clout to arm-wrestle the Department of the Treasury to make it effectively a huge lobby for the banking sector.
The Ratings Agencies are a valuable tool to let other banks know how healthy the assets of other banks are. But by the start of the 21st century, banks were already paying bonuses to those employees in the Ratings Agencies who would give those banks the highest ratings. In other words, corruption and bribery.

These "bonuses" would soon come back to haunt the Ratings Agencies. Because by this point the ever expanding economy was being fuelled by speculation and a property bubble creating by those same all-powerful, un-regulated banks. Furthermore, due to the Ratings Agencies and deregulation, those banks could, by 2007, take out loans that were tens of times higher than the entire bank's actual value - in some cases, loans worth up to 30 times the bank's actual assets.

This massive overlending (called "leverage" in banker's jargon) was made possible by offering, for example, mortgages to those who weren't actually able to afford them. Because of the inherent risk of offering loans to such clients, the interest rates were higher. But the banks, blindly ignoring the obvious risks, saw only the high interest rates, so these types of "risky" but highly profitable loans because the norm in many cases.

The final thing to remember, piling risk upon risk, was that the banks were able to divide all these "risky" loans into one big bundle with other, safer, loans. This bundle was then divided into many segments, and each segment swapped with other investment banks for financial gain. The "reasoning" was that dividing up the "risky" loans with the safe loans, it would make it safer for everyone concerned. But if it came to a time when anyone wanted to know who held the "risky" loans, no-one would have any idea where they were. Perfect, eh?

So when the whole house of cards finally came crashing down in the autumn of 2008, all the major banks became effectively bankrupt due to their own recklessness and stupidity, as well as the immorality of the corrupt system of Ratings Agencies.

The goverments balied them out; they had to in order to prevent another Great Depression. The fact that the leading banks of the financial world, who were so all-powerful, could be so financially idiotic as to not understand that they had created a huge confidence trick on each other and the rest of the world, is breathtaking.

So you would think that the governments would see that deregulation doesn't work.

Some governments thought that; fewer of them actually did anything that would remotely prevent it from happening again.

The reason was simple: the leading governments of the world were getting their advice from the leading financial experts of the world. The leading financial experts were trained in the same theories that had created the mess; furthermore, many of them were bring paid by the same banks that had created the mess, to give their "advice" to the governments of the world.

The result is that the leading banks of the world, except for the brief period when they thought they would go bankrupt in September 2008, were not in favour of deregulation. And the problem wasn't just that the governments' advice was coming from academics who were already financially tied to those same banks.

The other problem was that, in the past thirty years since deregulation, the banks had not only become much bigger; they had also become far fewer in number. In other words, the banking sector was a kind of financial oligarchy. In the USA, there were effectively only four major banks in the country; others had either gone bankrupt or been bought out by others since 2008.
That was what created the term "Too Big To Fail". This helped the banks play on governments' fear of causing another, even deeper, crisis, and left the governments' mute in the face of the banks' demands for financial protection.

So what should have been a golden opportunity for goverment to right the wrongs of deregulation thirty years ago, turned into the banks' golden opportunity to cement their financial power over government. The banks did the crime; the government paid for the time. And now all government taxpayers are funding that "bail-out", through cuts to government services and tax rises. A bail-out, indeed: the biggest in history.

And what lesson have the banks learned from this disaster of their own making? That we can do no wrong. We are Gods.

I wonder what Ayn Rand would have thought of this.

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