What caused the financial crisis on Wall Street?

[edward]

From PBS Frontline:

http://www.pbs.org/wgbh/pages/frontline/money-power-wall-street/

The first two parts of the most recent and informative documentary on Wall Street and the financial crisis. The next two air next Tuesday.

Frontline spills the beans and opens several cans of worms.

9 hours of interviews are also available online from the link.

 

[Astronuc]

Richard (Dick) Kovacevich was appointed chairman and CEO of Wells Fargo & Company in 2001and served through 2009 - "This financial crisis should never have happened.", "The financial services industry caused this crisis." and "And quite frankly, it even got into greed and, I think, malfeasance."

http://www.pbs.org/wgbh/pages/frontline/oral-history/financial-crisis/richard-kovacevich/

http://www.pbs.org/wgbh/pages/frontline/oral-history/financial-crisis/tags/subprime-mortgages/
http://www.pbs.org/wgbh/pages/front...al-crisis/tags/should-we-have-seen-it-coming/

What did your fellow bankers say to you when you told them that you thought this stuff was toxic and you weren't going to bite?

Well, the ones that were in it said I was wrong, and "Everything's fine. We don't see any losses occurring in this. We think it's improving homeownership. It's good for low-income people who have not had a chance to buy a home." And my answer to that was, "The only reason you're not seeing losses [is] because you're seeing massive delinquencies, 30 to 40 percent delinquencies." Sometimes, in a significant amount of cases, people weren't even making their first payment.

But what was hiding the losses was the fact that home prices, between 2000 and 2006, rose by 120 percent. Never happened over any six-year period in the entire history of the United States. And what happened is that because the prices increased, even when there was a foreclosure, you could resell the house at about the level of the mortgage, and so no one lost money.

Because your collateral was so good.

And all's you knew for sure, as soon as those prices didn't increase at this rate -- they didn't even have to go down -- didn't increase at this rate, you were going to have massive losses. And that's why -- we weren't the only one to see this. There were hedge funds; [founder and president of Paulson & Co.] John Paulson has supposedly made a lot of money on this; [founder and president of Greenlight Capital] David Einhorn. There's all kinds of people who -- for people to say no one could have seen this is a total mistake.

Like I say, we even mentioned it in our annual reports that this stuff was getting crazy. And that's basically -- and that was my argument, is that it is a problem that was being hidden by house prices. So we had our differences of opinion.

 

[edward]

Great links Astronuc.

Next week: How the Financial Crisis Never Ended.

A preview.

http://www.pbs.org/wgbh/pages/front...xt-week-how-the-financial-crisis-never-ended/

 

[russ_watters]

Hmm...so if people who shouldn't have been able to buy could, that probably increased housing prices due to supply and demand. So the banks created a self-feeding bubble.

 

[John Creighto]

Hmm...so if people who shouldn't have been able to buy could, that probably increased housing prices due to supply and demand. So the banks created a self-feeding bubble.

That's the problem with cheap money. If one could always borrow to cover their debts then it is almost like being able to print money. It is almost like counterfeiting.

The first people who get the new
money are the counterfeiters, which they then use to buy
various goods and services. The second receivers of the new
money are the retailers who sell those goods to the counterfeiters.
And on and on the new money ripples out through
the system, going from one pocket or till to another. As it does
so, there is an immediate redistribution effect. For first the
counterfeiters, then the retailers, etc., have new money and
monetary income which they use to bid up goods and services,
increasing their demand and raising the prices of the
goods that they purchase. But as prices of goods begin to rise
in response to the higher quantity of money, those who
haven't yet received the new money find the prices of the
goods they buy have gone up, while their own selling prices
or incomes have not risen. In short, the early receivers of the
new money in this market chain of events gain at the expense
of those who receive the money toward the end of the chain,
and still worse losers are the people (e.g., those on fixed
incomes such as annuities, interest, or pensions) who never
receive the new money at all. Monetary inflation, then, acts
as a hidden "tax" by which the early receivers expropriate
(i.e., gain at the expense of) the late receivers. And of course
since the very earliest receiver of the new money is the
counterfeiter, the counterfeiter's gain is the greatest.

http://mises.org/books/fed.pdf

Well the analogy to counter-fitting might not be obvious it is well accepted that banking policies are often inflationary.