October 15, 2011

Wall Street has issued a formal response to the protesters.  A recent article from the WSJ, which is exemplary of Wall Street consensus opinion, argues condescendingly that the protesters fundamentally misunderstand the financial crisis, and have enthusiastically swallowed the lies of the current leftist government.  Nothing could be further from the truth.

“Reckless government policies, not private greed, brought about the housing bubble and resulting financial crisis,” states the WSJ article.  This is blatantly wrong.  

Private greed was an integral part of the financial meltdown.  For example, loan officers at private banks knew they were issuing loans to borrowers who couldn’t pay it back, but they didn’t care, because the private banks were making a profit.  If that’s not private greed, I dont’ know what is.

The same can be said for everyone who participated in lending trillions of dollars to homebuyers who ultimately defaulted on those loans.  In trying to help more people own homes, the government did play a role  - but this role was heavily influenced by Wall Street lobbyists and corrupt politicians who have, as a result, cast a dark shadow of culpability on people for simply wanting to own their own home.

Follow the Money

1.) Local Banks: It begins with a homebuyer who needs money to buy a house.  Homebuyers borrow money from their local bank, and then “own” their own home.  But these banks get the money from…

2.) Intermediaries: Most of the mortgage market, especially the sub-prime market, went through Fannie Mae and Freddie Mac – government created entities which purchased those mortgages from the banks who originally lent the money.  The continued purchasing of mortgages by Fannie/Freddie enabled banks to make a short term profit by continuing to lend to borrowers who, we now know, wouldn’t pay back the loans.

3.) Wall Street: Fannie and Freddie then securitized these mortgages, enabling the mortgages to be traded on Wall Street. Through a series of intermediaries, Wall Street investors provided the money which was loaned to sub-prime borrowers.  But of course, the Wall Street Journal would have you believe that Wall Street deserves no blame.

The Role of Government in the Meltdown

Since the beginning, Americans have valued independence, ownership, and personal responsibility.  The American Dream itself includes owning a home – this is exactly the motivation behind the government policies that Wall Street deems unwise.  What’s so wrong with helping people to own their own home?

Wall Street blames government for the bad investing strategies of Wall Street, demonstrating a complete lack of ability to take responsibility (see above paragraph) for anything.  Wall Street takes it further, and concludes that protesters are gullible, because the protesters refuse to participate in Wall Street’s blame deflection game.  Though Wall Street gleefully bought bad loans with zero analysis into what it was actually buying, in turn enabling the crisis to happen, it is, somehow, blameless.

According to Wall Street.

The Real Cause of Our Meltdown

…is high costs of information.  Wall Street was purchasing, hand over fist, debt which it did not understand.  This debt turned out to be far more risky than anticipated, and in wasting their own money, investors also took down the rest of the economy as collateral damage.  This is what happens when we, as a society, allow policy decisions (such as, “What proportion of society should own a home, and what proportion should rent?”) to be made by individuals behind closed doors, away from the public eye, who themselves do not have the relevant information needed to make a properly informed decision.

The high cost of this information is due to the vastly overcomplicated, tenebrous, mysterious political-economic system in our country and our world.  Such a deeply entrenched, global problem might, for some, seem to be unfixable, if it weren’t for the tsunami of informational accessibility growing in our world at an exponential pace.  Wherever I see high costs of information, I see the same solution every time: the internet.

Information is free, and it should be free.  Those who stand in the way of freedom of information cast an implicit vote in favor of having another, worse, financial crisis.

The government supplied the balloon, Wall Street supplied the air, and when it popped, the government bailed out Wall Street.  In return, Wall Street, inexplicably, and unanimously, blames the government.

For-Profit Government and the Blurry Line Between Wall Street and Washington

Franklin Raines, chairman of Fannie Mae in the lead up to the financial crisis, was well compensated for his effort in ensuring the downfall of the American economy.  He received well over $50 million in bonuses, and was forced to return less than $10 million in a later settlement.  Raines is a perfect example of the pseudo Wall Street executive / pseudo Government official who was vastly overcompensated by a ponzi scheme engineered to defraud the citizens of of the US, and was tragically under-punished for that fraud – where there is injustice, there can be no peace.

Lobbyist Influence

The middlemen of the financial crisis (like Raines) made an enormous amount of money in the lead up to 2007, and they used this money to influence Washington through tens of millions spent on lobbyists.  How can Wall Street blame Washington, when its own lobbyists were the ones telling Washington what to do?  Wall Street and the 1% will do anything it can to justify its reprehensible position in this mess.  Wall Street will continue to try to group the #occupiers in with Democrats, but #occupiers are just as furious at Democrats as Republicans; indeed, #occupiers are fed up with the broken political system in general.  They protest because for-profit corporations and for-profit government are starting to look too similar to distinguish.

Information Costs

It really does all come down to the availability (or lack thereof) of relevant information, which has been previously entrusted to quite corrupt ratings agencies.  ”The ratings agencies, thinking they were simply dealing with traditionally appreciating mortgages, didn’t look under the hood,” writes Michael Flynn.  Indeed, the ratings agencies were our last line of defense against the bad information which caused the crisis.  At best, rating agencies were negligently asleep at the wheel, but I’m sure we all remember from The Godfather Part 2 that when your guards disappear immediately before an attempt is made on your life, it goes far beyond negligence.  Paul Krugman agrees.

The root cause of the financial crisis is the high cost of information.  It’s actually very easy to lower the costs of information, and the recipe usually looks like this: use the internet.

If mortgage information were easily shared and open to all involved parties, then the Wall Street purchasers of bad debt would have known just how bad that debt was, and price would have responded accordingly.  We can blame each other, we can blame the government, we can blame Wall Street (Wall Street will certainly continue to blame America), we can blame real estate agents, banks, borrowers, whatever.

The beauty of capitalism is that we all have a role, and when Wall Street comes out issuing formal declarations that “Wall Street protesters are gullible, it’s the government’s fault, and private greed is not to blame, carry on with your record level youth unemployment and ignore our astronomical profits,” it makes it so very much easier for protesters to brave the weather, the pepper spray, the questionable jailings and disrespect that they’re sure to continue to receive.  The high cost of information, not law abiding people, are to blame.

Greed is a Pointless Scapegoat

Greed is deplorable, but our society should be strong enough to survive alongside this everyday emotion.  If our economy was weak enough that sinning would topple it, then it might as well have been toppled from the outset.  We should prepare for greed, but expect better of people.  Our society should be one where it continues to function and prosper in the face of private greed.  My single demand, rather than scolding people for greed, lust, envy or whatever, is this: The people should make decisions for our society, and the people should have adequate information in making those decisions.

Wall Street has issued its best response to the #occupiers, and it completely misses the mark, failing to be little more than an attempt to deflect blame onto the very government over which it has enormous influence.

Let us not forget that all of Wall Street’s assets, money, and in turn profit, originates from Main Street bank accounts, and that sovereignty originates from the people.  We have the power, we just don’t know how to use it yet.