credit crises

Excellent MUST LISTEN interview with former CFTC regulator on the financial crises

Michael Greenberger, former Director of Trading and Markets at the Commodity Futures Trading Commission (CFTC), was interviewed by NPR’s Terry Gross this past Thursday, April 3. He explained that the sub-prime mortgage crisis was caused by financial derivatives, and that there are more crises coming, because there are many more financial derivatives out there. He notes that the one act of deregulation most to blame – even more to blame than the 1999 repeal of the Glass-Steagal Act (the law passed in the First Great Depression to separate commercial banking from investment banking) is the Commodities Futures Modernization Act of 2000, introduced on the sly by then Senator Phil Gramm (R-TX), who is now the top economic advisor to John McCain:

And Greenberger warns that we are at the beginning of the financial crises, not the end.

When people tell you this is the worst economic crisis since World War Two, that’s a way of not saying the panicky thing, which is, we may be heading for a depression. And if a Bear Stearns collapses, you’re going back to 1929.

The [stock] market went up last week because there is the belief that Bear Stearns is the end. But there are some of us who are very worried that Bear Stearns is the beginning and not the end, and if we needed $30 billion to bail out Bear Stearns . . . .

Risk, Uncertainty, and the Real Economy

Last week, the financial news was full of stories on credit default swaps, which appear to be the next shoe ready to drop in the financial crises millipede that has engulfed the globe since the IKB Deutsche Industriebank of Germany announced on July 30, 2007 that it was marking down the value of some of its financial derivatives based on U.S. sub-prime mortgages. From the comments posted in various blog discussions, of credit default swaps, it is very clear that most people are very, very confused. More troubling, most people are unable – or unwilling – to recognize that the world as they know it now crashing down about their ears.

Very basically, what is happening is that the financial and banking system has found that what it thought was measurable risk is instead unmeasurable uncertainty. And what the system cannot measure, it is unwilling to deal with. This uncertainty has now extended to the financial health of the very banks, hedge funds, and other financial agents themselves. Nobody knows how healthy or unhealthy anybody else is. Therefore, the banks and other agents in the financial and banking system have become unwilling to lend to one another. Goldman Sachs has estimated that these crises have contracted credit in the U.S. by $2 trillion (with a t, not a b). The U.S. economy is now about $15 trillion, as measured by gross domestic product--you can do the math for yourself, to see what a massive impact this is going to have on the real economy.