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03/02/2009

Pointing Fingers

Financial crisis(1) It seems everyday different news sources and websites start a new series to explain the financial crisis. Slate.com has a new one today creatively titled "Making Sense of the Credit Debacle."

In the first entry, Barry Ritholtz takes the on the "perfect storm" explanation offered by such financial "geniuses" as Donald Trump and Alan Greenspan:

The perfect-storm metaphor is imperfect; rather, what led to the current situation were numerous legislative, ideological, and business decisions that worked together to create a systemic failure

Ritholtz then goes on to list for policy changes that, if he had a time machine, he would go back and try to change:

  • The Commodities Futures Modernization Act (2000) allowed unregulated derivatives to run wild. (Legislation put forth by Republican members of the House and Senate, though it was signed by Bill Clinton).
  • The repeal of Glass Steagall (1999) allowed depository banks to become far more intertwined with Wall Street. (The repeal of this act was, again, put forth by Republicans and passed by the then Republican Majorities of Congress)
  • From 2001-03, Fed Chair Alan Greenspan took rates down to unprecedented levels, causing 1) a mad scramble for yield and 2) an enormous housing boom. (If internet sources can be believed Greenspan is a self-described "Republican libertarian." He was appointed by Ronald Reagan, otherwise known as the Republican Messiah)
  • In 2004 SEC allowed the five big investment banks to leverage up from 12-to-1 to 35-to-1 or more. (I had to look up want this meant. Basically for every one dollar of equity banks were allowed to have twelve dollars of debt, until the geniuses at the SEC allowed five banks (Bear Stearns, Lehman Brothers, Goldman Sachs, Merrill Lynch and Morgan Stanely...I'll let you look up which TWO of these five is still barely staying afloat) allowed this ratio of equity to debt go as high as one dollar of equity to thirty five dollars of debt. At the time, William H. Donaldson was chairman of the SEC, and he was...can anybody guess? Yes a Republican. He was aided by Harvey Goldschmid, who though a democrat proved to be an ally for Donaldson. After Donaldson, Christopher Cox, a 17-year republican member of congress, took over and failed to peer into the the financial workings of the five banks though, supposedly, this deregulation allowed a wider window).
For sure these four things contributed the current cluster**** that is our credit market, but distilling the crisis to these four things paint the picture that Republicans (and a few democratic patsies) are almost soley responsible.

However, where is the mention of subprime lending? Why not bring up the abuses committed under the Community Redevelopment Act? What about some of the dubious practices of Fannie and Freddie Mac?

I mean go to any conservative website and you'll find similiar lists to the one above except it frames the Democrats.

Can't anyone rise above fixing the blame on the opposite party? What most frustrates me is, were you not to research the four points above, you would find this an objective explanation and not think anything of it. I'm sure Ritholtz knows better. I mean, I'm guessing he's smarter and more knowledgeable than I am.

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Austin Diaz

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