permaculture

[Nicholas Roberts <nicholas@themediasociety.org>]

Volume 56, Number 2 · February 12,
2009<http://www.nybooks.com/contents/20090212> How
We Were Ruined & What We Can Do By Jeff
Madrick<http://www.nybooks.com/authors/2> The
Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit
Crash by Charles R. Morris

PublicAffairs, 194 pp., $22.95
Financial Shock: A 360° Look at the Subprime Mortgage Implosion, and How to
Avoid the Next Financial Crisis by Mark Zandi

FT Press, 270 pp., $24.99
The Reckoning a series of articles by Gretchen Morgenson et al.

*The New York Times*, September 28–December 28, 2008

Some prominent figures in the financial markets insist that unchecked
opportunism by financiers was not a root cause of the current credit crisis.
Robert Rubin, the former Treasury secretary who has just resigned as a
high-level adviser and director at Citigroup, told *The Wall Street
Journal*in November that the near collapse of Citigroup, which was
bailed out by the
federal government, was caused by the "buckling" financial system, and not
any mistakes made at his company. "No one anticipated this," said Rubin, who
once ran the investment firm Goldman Sachs. Others such as Harvey Golub,
former chairman of American Express, maintain that the fault lies
principally with the federal government, which since the 1990s and even
earlier has been actively promoting mortgages for low-income Americans.
This, he argues, led to the unsustainable frenzy of sub-prime mortgages in
the 2000s.

Charles Morris's informed and unusual book, *The Trillion Dollar Meltdown*,
provides a decisive rebuttal to all such excuse-making and blame of
"government." Morris makes it clear that it was an unquenchable thirst for
easy profits that led commercial and investment banks in the US and around
the world—as well as hedge funds, insurance companies, private equity firms,
and other financial institutions—to take unjustifiable risks for their own
gain, and in so doing jeopardize the future of the nation's credit system
and now the economy itself. In fact, government-sponsored entities, Fannie
Mae and Freddie Mac, did have a part in the crisis, but not because they
were principally trying to help the poor buy homes. Rather, they were also
trying to maximize their profits and justify large salaries and bonuses for
their executives. They had been made into publicly traded companies in 1989.
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It would be wrong to conclude, however, that the new investment vehicles and
intricate strategies for "securitization" that developed in the last thirty
years had no value. Beginning in the late 1970s, the practice of packaging
mortgages together and marketing them as so-called "collateralized debt
obligations" was initially designed with the sensible aim of spreading the
risk of making loans, particularly residential mortgages, by selling them to
many kinds of investors throughout the US and eventually around the world.
If many parties share the risk, this lowers the cost of borrowing and
enables more people to buy homes and businesses to invest more in research,
plants, and equipment.

But over the last two decades, this innovative system was exploited to
stunning excess. Charles Morris is one of the observers who, contrary to
Rubin's claim that no one foresaw the current crisis, anticipated that the
increasing gathering of mortgages into highly attractive investment devices
had made the financial system dangerously vulnerable. A former banker
himself, and author of several excellent books on finance over the past
thirty years, Morris has described the intricacies of the American
investment world as clearly as anyone. At the time of his latest book's
publication at the start of 2008, it seemed far-fetched for him to say that
the cost of the financial meltdown throughout the world was a trillion
dollars. In fact, Morris may have underestimated the amount of financial
damage. Estimates of losses by financial institutions now range between $1
trillion and $2 trillion.

Morris starts his account of the unwinding of the markets with the collapse
of the housing market, as does Mark Zandi, a respected Wall Street
economist, whose book *Financial Shock* is intelligent, useful, and a more
recent if less detailed book on the crisis. But the crisis cannot be
understood without looking back a couple of decades to the development and
rapid spread of the investment technique on Wall Street of packaging loans,
principally mortgages made by banks and savings and loan associations, into
an investment vehicle in which pension funds, money managers, foreign
governments, hedge funds, and others could invest. Securitizing residential
mortgages in this way was especially appealing, in view of the size of the
US mortgage market, which runs into the trillions of dollars.

There was a strong precedent. The Federal National Mortgage Association, or
Fannie Mae, established in 1938, had been packaging federally insured
mortgages since the 1970s and selling them to investors. It was joined by
the Federal Home Loan Mortgage Corporation, Freddie Mac, started in 1970.
The two government-sponsored organizations bought up many of the mortgages
on the books of commercial banks and savings and loans, allowing them to
write more such mortgages, thus making home ownership more widely available
to Americans. Owning a home in America is an integral part of the nation's
promise. Even in the revolutionary years a far higher proportion of
colonialists owned property than in the Old World. And today no transaction
is more favored by income tax advantages, including the deductibility of
mortgage interest, than the purchase of a home. Home ownership is the
principal source of the typical American's wealth.

But in the late 1970s, investment banks—Salomon Brothers in
particular—discovered a profitable new source of business in these
mortgage-backed securities and began packaging them in a way that made them
more like conventional bonds, except that they paid higher interest. The
most important breakthrough, says Morris, came in 1983, when an innovative
banker at First Boston, Larry Fink, divided packages of mortgages into
several different tiers of risk with appropriately graduated interest rates.
These tiers are now called "tranches," the French word for "portion" or
"slice." Fink's innovation attracted many more clients, including pension
funds and major money market institutions, to invest in mortgage-backed
securities, and eventually the private market accounted for substantially
more such securities than did the government.

The first tier—or some 60 percent of all the investors in a mortgage-backed
security—was to be paid interest and principal fully from the monthly cash
flows of the mortgage holders and was therefore best protected. But these
investors received the lowest interest rate. The more subordinate tiers were
paid off after this senior tier received its payments, and thus earned
higher interest because of the higher risk of nonpayment. The lowest tiers
were the riskiest, the so-called toxic waste, which would get money last,
and therefore lose money first if there were unanticipated defaults. But
these investors were paid two to three percentage points more in interest to
take the risk. This toxic waste was typically bought by hedge funds, the
aggressive investment vehicles that took higher risks to earn higher returns
for their investors, and often borrowed liberally to increase their returns
on capital even further.

For the banks and mortgage brokers who wrote the mortgage loans, the
financial advantage was significant. They could now sell the mortgages they
wrote almost immediately to packagers, often investment banks, earning a
quick and very handsome fee—one half to 1 percent of the value of the
mortgage—in the process. By selling the mortgage loans, the banks did not
have to maintain capital requirements for those loans, requirements that
were imposed internationally by the Bank for International Settlements in
the 1990s. The banks and mortgage brokers were then free to make still more
loans with the cash they got back from selling the packaged mortgages and
quickly to earn another round of fees.

Homeowners also benefited significantly from the securitization. In response
to the demand for mortgages by pension funds, investment managers, banks,
hedge funds, and others across the globe, mortgages were easily granted;
banks and mortgage brokers lowered the interest rates on mortgages charged
to home buyers in order to attract more customers. It was principally the
investor appetite for the mortgage-based securities and the easy profits
made by the banks and mortgage brokers that led to the mortgage-writing
frenzy in the 2000s, not encouragement by the federal government to lend to
low-income home buyers.

Securitization of mortgages was not all. In the 1990s, commercial and
investment bankers expanded the market for new forms of insurance, called
credit default swaps, which would supposedly guarantee holders of
mortgage-backed securities against losses incurred by defaults. These were
complex transactions involving derivatives—investment vehicles such as
options or futures contracts based on traditional stocks, bonds, and
averages or indices of stocks or bonds. Such insurance protection encouraged
investors, including hedge funds and commercial and investment banks, to be
still more bold in packaging and investing in mortgage-backed securities.
Now that many of these mortgages have in fact defaulted, whether most of the
insurance claims on them will be met is still an open question. AIG, the
giant insurance company that was rescued by the federal government in
September, for example, backed many of these insurance products and may not
be able to meet its obligations.

By the late 1990s, America's credit system had changed radically. Enormous
numbers of loans were held, not on the balance sheets of commercial banks or
thrift institutions, which are regulated by the federal government, but in a
rapidly growing "shadow" banking system of hedge funds and other unregulated
investors in New York, London, and around the world. This shadow banking
system in effect made the loans, but unlike commercial banks, which have
reserve and capital requirements legally imposed upon them for activities on
their balance sheets, and are also subject to Federal Reserve scrutiny, its
capacity to borrow was by and large unrestricted. By the 1990s,
securitizers, often investment banks and even commercial banks, were
packaging not only residential mortgages but also equipment loans,
commercial mortgages, credit card debt, and even student loans—known in
general as collateralized debt obligations (CDOs)—and the shadow banking
system was buying them. Morris writes that 80 percent of all lending by 2006
occurred in unregulated sectors of the economy, compared to only 25 percent
in the mid-1980s.

The mortgages traveled such a long distance from institution to investor
that no one was in personal touch with the actual mortgage holder any
longer. Now, the likelihood of defaults was assessed not by someone who
tracked a specific mortgage holder but by complex, computer-generated
statistical models of the entire portfolio of mortgages. Like all such
models, no matter how mathematically intricate, they required an estimate
about the future based on the past—an estimate that was inherently incapable
of adequately taking into account the consequences of a historically rare
and therefore seemingly unlikely crash in housing prices.

In addition, the ratings agencies used these statistical models to award
ratings to the mortgage-backed obligations sold to investors. The ratings
agencies were paid by the commercial and investment banks, who sold the
packages of mortgages according to their rating, and who invariably
benefited more the higher the rating. The agencies now have much to answer
for.

The recession of 2000 and the World Trade Center attacks of September 11 led
the Federal Reserve under Alan Greenspan to cut its target interest rate,
the federal funds rate, from 6.5 percent at the end of 2000 to 1 percent in
2003, the lowest since the 1960s. For major institutions borrowing was now
almost free, but there was no commensurate increase in the federal scrutiny
of the loans being made, a power the Federal Reserve had but that Greenspan
foreswore. And investment banks, hedge funds, and even commercial banks
through off-balance-sheet subsidiaries known as structured investment
vehicles borrowed aggressively to invest in the mortgage-backed
securities—sometimes their borrowings amounted to thirty or forty times
capital. The structured investment vehicles, typically domiciled in the
Cayman Islands, enabled the banks to avoid higher capital requirements
placed on balance sheet loans and closer scrutiny by the Federal Reserve and
other federal watchdogs.

Because the short-term interest rates most affected by the reduced federal
funds rate were so low, investors, including commercial banks, borrowed
money in the form of short-term commercial paper, and invested it in the
longer-term mortgages, adopting exactly the highly dangerous strategy that
led to savings and loan bankruptcies in the late 1980s. Commercial paper
consists of loans businesses make to one another with their temporarily
excess cash. If rates suddenly went up on the commercial paper, profit
margins on the long-term investment, whose rates stayed the same, would
disappear, and they did. Not to have taken account of this result was a
crucial and unambiguous example of irresponsibility by executives at banks
like Citigroup.

The new financial structure might have worked out nevertheless had the loans
been as safe as widely believed. It turned out that they were not. The
investors had failed to scrutinize them. By 2006, Zandi points out, more
than $1.1 trillion of the $3 trillion in mortgages written were either
subprime—mortgages to individuals with questionable ability to pay—or
so-called Alt-A loans—made to people without verifying their income.

Most remarkable, perhaps, the frenzied subprime lending occurred after the
housing market had already climbed to unthinkable heights. On average, the
prices of homes had been rising since the early 1980s, but between 2000 and
2005, they leaped by 50 per-cent despite low inflation. Yale economist
Robert Shiller estimated that it was the largest housing boom in American
history. Of course, the easy mortgage availability and low rates fueled the
rising market.

Some mortgage brokers claim that the subprime mortgage holders were simply
irresponsible, buying houses they couldn't afford. In fact, bankers and
mortgage brokers promoted enticing loans, the most important of which was
the adjustable rate mortgage, or ARM, in order to lower mortgage payments
temporarily to levels that might seem well within the means of lower-income
buyers. The initial interest rate on an ARM was about 3 percent, or even
lower, but it would be automatically reset higher in two years. Surveys
showed that many mortgage holders did not understand the terms. Remarkably,
Alan Greenspan publicly suggested that if borrowers failed to take advantage
of the ARMs, they could lose "tens of thousands of dollars" on their
mortgage payments.

But Zandi makes clear that the mortgage writers believed house prices would
continue to rise, enabling the owners to refinance their mortgages at a
value higher than the original mortgage and at more advantageous terms. A
rapidly growing proportion of the subprime loans in this period were also
made to speculative investors who bought several houses at a time and
"flipped" them to profit from the rapidly rising prices.

The housing market at last began to falter in the spring of 2006. At first,
home prices moved downward and then the rate of defaults by homeowners began
to escalate. The following year, the rates on many ARMs were reset upward,
adding an average of $350 to monthly payments, and doubling defaults to an
annual rate of 1.6 million by the end of 2007. That year, as housing prices
fell and defaults rose, the ratings agencies started downgrading some of the
mortgage-backed holdings on the books of investment banks, hedge funds, and
the subsidiaries of commercial banks. Their values began to fall in the
market. In addition, other packages of debt obligations based on consumer
debt or equipment purchases were looking less reliable.

As the mortgage-backed obligations began to look less sound, the commercial
paper buyers demanded higher rates, squeezing profits, and forcing the
investors to sell more of these obligations, pushing their values down
further. Eventually, many of the commercial paper lenders refused to lend
their short-term money to the investors at all.

What made matters worse is that when the values of these securities fall,
the banks and other investors are obliged to write down the investment on
their books —a widely practiced accounting rule, established by the
Financial Accounting Standards Board and encouraged by regulators, known as
mark-to-market. This produced losses that reduced capital and the ability to
make new loans. Meantime, lenders to these investors also typically require
that investors put up more money as the value of the investment falls—in
order to meet what is known as the margin requirement. This, too, resulted
in more selling.

When two hedge funds at Bear Stearns, with substantial investments in
mortgage-backed securities, had to unload investments to meet their margin
requirements in 2007, it generated such enormous losses that the old-line
brokerage firm, in order to avoid outright bankruptcy, had to sell itself at
fire sale prices to J.P. Morgan in early 2008, in a deal engineered by the
Federal Reserve. The Bear Stearns losses in 2007 were the first concrete
signs of looming catastrophe. Others were soon to come. Losses were being
announced publicly at America's leading investment and commercial banks as
well as foreign banks like the Royal Bank of Scotland and Switzerland's UBS.
[1] <http://www.nybooks.com/articles/22280#fn1>

An excellent series this fall in *The New York Times*, called "The
Reckoning," has provided fascinating insights into the reckless
decision-making in some financial firms in the years just preceding the
crisis. One of the reporters for the series, Gretchen Morgenson, describes
how Merrill Lynch made twelve major acquisitions of mortgage and real estate
companies between 2005 and early 2007 in order to take advantage of the
boom, packaging the mortgages into mortgage-backed obligations themselves
and selling them off or investing in them.

Merrill earned record profits in 2006 and set another record in the first
quarter of 2007. But a common view outside the firm, Morgenson found, was
that the Merrill executives did not understand the risks they were taking—or
were perhaps deliberately looking the other way. Investors on all sides of
these transactions were making a fortune. By the summer of 2007, with
defaults rising and the value of the mortgage-backed obligations falling,
the magic powder quickly turned to dust, and that October, Merrill reported
a $2.3 billion loss. Stanley O'Neal, the chief executive, was forced to
leave, as were other executives. But O'Neal took with him a $160 million
severance package. Under O'Neal's successor, John Thain, former head of the
New York Stock Exchange, Merrill sold itself to Bank of America in September
2008, during the same week in which the prestigious firm Lehman Brothers
collapsed and AIG was bailed out by the federal government.

The *Times* series tells similar stories about the management of Citigroup,
which tripled its issues of CDOs between 2003 and 2005, under the leadership
of Charles Prince and, reportedly, the encouragement of Rubin. As late as
the fall of 2007, reporters Eric Dash and Julie Creswell found, Prince was
assured by the bond executives that the company would not suffer serious
losses. Little attention was paid to risk taking. Less than a year later,
total losses at Citigroup exceeded $65 billion and the bank was forced to
seek federal help to stay in business. But Charles Prince, like Stanley
O'Neal, walked away rich from Citigroup when he was replaced in 2007.

The Federal Reserve, which since 2006 has been led by Ben Bernanke, a former
Princeton professor, only started cutting interest rates in the fall of
2007. In fairness to Bernanke, he was bold in light of the widespread
opposition to such a cut. Many economists were worried at the time that rate
cuts would reinforce an improbable resurgence of inflation.

One problem was that the Fed did not have adequate information about these
markets because derivatives were not traded openly and the latest CDOs,
including mortgage-backed obligations, were mostly on the books of the
shadow banking system. It was a serious lapse of judgment, not to mention
responsibility, on the part of the Federal Reserve under Greenspan and the
Securities and Exchange Commission under Christopher Cox to fail to seek
more comprehensive information far earlier about the surge of lending.

After the Federal Reserve stepped in to avoid a Bear Stearns bankruptcy in
the spring of 2008, Treasury Secretary Henry Paulson continued to reassure
the public that the mortgage crisis was contained. But only after Lehman was
allowed to go bankrupt in mid- September, followed by the collapse of AIG
and other financial institutions, did he at last demand the controversial
$700 billion bailout fund from Con-gress and eventually proceed to supply
capital to banks with part of it.

But even with the new capital, the banks were not lending appreciably more;
nor, without specific stipulations guaranteeing their loans, should anyone
have expected them to do so. The values of even more solid mortgage-backed
obligations based on prime mortgages were falling and eating up the new
capital.

Bernanke then cut the funds rate sharply again, lowering it in all to 1
percent from more than 5 percent in mid-2007, but with falling housing
prices, credit largely unavailable, and declining consumer confidence, a
serious recession was not to be averted. The Fed has taken other bold
actions by buying or guaranteeing assets held by institutions. But as of
this writing, defaults on mortgages are still running high, and all kinds of
consumer and business loans are now under similar threat.

At the end of 2007, the administration and Congress pieced together a first
stimulus plan composed of government spending and business tax breaks. It
was not enough. The rebate checks eventually doled out to most American
consumers were swallowed by the rapidly rising price of gasoline in the
spring and summer of 2008. Congress talked about a second stimulus plan but
it failed to act, partly because the administration offered no support. In
2008 job losses reached 2.6 million, and by December President-elect Obama
was discussing an "economic recovery" package of more than three quarters of
a trillion dollars, unthinkable only three months earlier.

The Obama team has not yet announced its thinking about how to reregulate
the financial community once the economy is righted again. The team of
economists headed by Lawrence Summers, the former Treasury secretary
(1999–2001), were, after all, themselves supporters of financial
deregulation in the 1990s when most of them were members of the Clinton
administration. As the *Times*'s series notes, Rubin, who preceded Summers
as Treasury secretary (1995–1999), Summers, then his deputy, and Greenspan
opposed regulating derivatives. In 1999, Rubin and Summers supported the
repeal of the Glass-Steagall Act, the New Deal restriction separating
investment and commercial banking.

In fact, with the blessings of the Clinton administration and Greenspan,
commercial banks were already engaging in many of the more aggressive
activities of investment banks; and investment banks, along with hedge
funds, private equity firms, and other institutions, as we have seen, were
making the loans once the province of commercial banks through purchases and
packaging of mortgage-backed obligations. The Bush administration took
deregulation further, essentially eliminating, for example, limits placed on
borrowing by major investment banks.

One principle should dominate future regulation—the shadow banking system
should be brought under the same regulatory oversight as commercial banking.
In sum, these firms must maintain minimum capital requirements against the
loans they make and mortgage-backed obligations and other CDOs they buy,
just as commercial banks do. The structured investment vehicles commercial
banks use to avoid such capital and other requirements should be disallowed.
A federal agency, most desirably the Federal Reserve, should have the
authority and obligation to examine the books of investment banks, hedge
funds, and other participants in the shadow banking system to determine the
quality of their investments and to set the standards by which capital is
deemed adequate. Derivatives should be required to be listed on an exchange,
where information about them and their prices is openly visible to market
participants and federal authorities.

Rules are not enough, however. Greenspan had been given the authority to
examine the quality of mortgage lending by Congress in the 1990s, but simply
did not use it, pleading free-market principles. The SEC under Bush
appointee Cox could have examined the books of investment banks, but again
mostly did not bother. Congress will have to talk louder and exercise
stronger authority.

Any regulation should also take account of the incentives for managers to
take company risk for personal benefit. The ability to take immediate
profits from fees on risky loans infected the financial industry and
eventually the entire economy, and made possible disproportionately large
annual bonuses. These incentives were among the main causes of the
irresponsibility on Wall Street. The best way to prevent that from occurring
is to base the bonuses and compensation of financial executives on the
long-term profitability of the investment firms for which they work.

But the first order of business is to right the economy, and so far there
has been only modest success at preventing matters from getting worse, for
all the seeming activity by the Fed and Treasury. The number of lost jobs is
rising sharply, consumption and manufacturing output are falling at record
rates, house prices keep sliding, and large firms, like Linens 'n Things,
have closed their doors. The major auto companies have only just won a
reprieve with a loan from the federal government. What makes this recession
more precarious than the steep 1982 recession is that a further fall in
incomes will bring another round of intense credit contraction, as more home
owners default, including prime borrowers. Now, many corporate borrowers are
also one or two steps away from defaulting.

The broad outline of a rescue plan should be clear. It requires a
two-pronged approach. First, the credit system must be unfrozen and loans
must flow again, including mortgages. Second, demand for goods and services
must be restored to slow the downward spiral of the economy, which is now
well underway.

Restoring the health of the credit system, while some slight progress has
been made, is not being managed well. The Treasury has given about half of
the $700 billion bailout money approved by Congress to the banks as capital
injections. But as noted, the banks largely have not used these funds to
revive the credit markets. In fact, Paulson's original idea to buy some of
the banks' assets that could not be sold or even priced, which was strongly
criticized, was clumsy and expensive but was based on a sensible principle.
If the banks are given capital, and it just falls down a hole because the
banks' assets keep losing value, little good is done. The value of the
assets have to be stabilized.

The recent bailout of Citigroup, which guarantees 90 percent of a portion of
the bank's investments for a fee to be paid by the bank, was more practical
if too generous to Citibank. A better proposal, offered by the Barnard
College economist Perry Mehrling, is to have the federal government either
insure or even buy the better assets of the banks, which have fallen
irrationally in value along with the so-called toxic assets. At a reasonable
cost, the federal government could then stop some of the bleeding and the
capital could be put to work to make new loans, including writing new
mortgages, and perhaps slow the fall in house
prices.[2]<http://www.nybooks.com/articles/22280#fn2>

But if defaults continue at their current pace, the value of mortgage-debt
obligations will remain under constant downward pressure, as will bank
capital. The Bush Treasury has done little about this, leaving the task to
modest measures taken by Fannie Mae and the Federal Deposit Insurance
Corporation and purchases of assets by the Fed. There is no easy or cheap
way to guarantee the bad loans, but ways must be found to slow the default
rate. It is of some concern that as of this writing we have not heard more
from the Obama transition team specifically on this issue.

Another necessary component for reviving the credit system involves the
self-destructive accounting rules and loan covenants that are making the
crisis worse than it need be. The losses required to be taken under
mark-to-market accounting, and the consequent reduction in capital,
reinforce the fall in asset values. Similarly, current ratings requirements
force the financial institution to sell investments to raise capital.
Federal authorities should imaginatively reassess these arrangements to
adjust them, even if only temporarily, to minimize the crisis. International
capital requirements should also quickly be relaxed.

The second major part of a rescue plan involves the so-called real economy.
If fearful Americans start saving as much of their income as they did even
in the early 1990s—a savings rate of 5 or 6 percent compared to nearly zero
in 2007—the economy will lose $750 billion to $1 trillion in buying power.
The stunning losses of stock market and housing wealth—which in the last
year total well more than $10 trillion—could cause consumers to spend
several hundred billion dollars less than was expected. Such a loss in
demand will drive employment and profits way down. Moreover, with the
federal funds rate already so low, the Federal Reserve's ability to
stimulate the economy by lowering interest rates is now
limited.[3]<http://www.nybooks.com/articles/22280#fn3>Thus, additional
federal government spending of as much as $750 billion a
year is by no means an exaggeration of what may be needed.

Here Obama has moved intelligently if cautiously in projecting a large
spending package, probably amounting to as much as $800 billion over two
years. He will invest part of the money in infrastructure and in clean
energy, with emphasis on measures to protect against global warming. Such
longer-term investment will create domestic jobs and is likely, if managed
well, to stimulate higher productivity. The package will also include
expanded unemployment benefits, aid to the states, and perhaps, to win
political support, substantial tax cuts. Again, however, the hole in the
economy may be still larger than Obama anticipates, and he may have to
address the possibility of a further stimulus in six months or so.

This is, as many economists now concur, the worst economic crisis since the
Great Depression. Financial market participants created a financial bubble
of tragic proportions in pursuit of personal gain. But the deeper cause was
a determination among people with political and economic power to minimize
the use of government to oversee the financial markets and to guard against
natural excess. If solutions are to be found, the nation requires robust and
pragmatic use of government, free of laissez-faire cant and undue influence
from the vested interests that have irresponsibly controlled the economy for
too long.

*—January 14, 2009*
Notes

[1] <http://www.nybooks.com/articles/22280#fnr1>The US commercial banks were
booking huge losses in their off-the-balance-sheet structured investment
vehicles. It turned out the banks were "warehousing" some of these
obligations on the books as well when they couldn't sell them, and are now
taking big losses there also.

[2] <http://www.nybooks.com/articles/22280#fnr2>Toward the end of December,
the Federal Reserve announced that it would accept some of these investments
in return for reserves, a useful attempt to stabilize these markets.

[3] <http://www.nybooks.com/articles/22280#fnr3>The Fed has other options,
including buying long-term bonds, which could help reduce mortgage rates and
prevent some defaults.

-- 
Nicholas Roberts
[im] skype:niccolor