Multiple Tsunamis of Defaults and Crises Seen Resulting from Failure of Finance Reform

Editor’s Note: It’s hard to imagine that we could have been any more scared than we were a year ago when it looked like we were going over a cliff. And yet we wasted the crisis and continue business as usual despite dire warnings from Simon Johnson (see article below) who has the prospective of being in senior management at the International Monetary Fund for many years, Elizabeth Warren (Chairman of the Congressional Oversight Committee), Ohio Congresswomen Marcy Kaptur and now Florida Congressman Alan Grayson.

Let’s talk turkey — this is like prohibition. Exactly how long does anyone think that virtually the entire middle class of this nation is going to quietly submit to economic slavery — regardless of whose fault it is? How long will someone continue paying on debt whose interest rate is too high to ever retire the debt or whose amount is too high to justify the home it financed? How long will someone sit in a house paying $2100 per month on a $225,000 mortgage when houses around him are being sold by “Specialty firms” (located in South Carolina) for $500 down, $300 per month? Stop kidding yourselves. People are going to simply stop paying and their credit rating be damned. And so many of them will be out there that a new credit paradigm will be required to reflect the new realities.

The “Masters of the Universe” and their congressional proteges along with the Wall Street perspective of the Obama team have it wrong. This is not going to work out the way they have it planned. People voted for change from business as usual not more of it. Debtors, (regardless of what you want to say about “personal responsibility”) are not going to stay enslaved to this system — and nobody can make them do it. Maybe the pretender lenders will continue to get away with this massive theft and squeeze the last ounce of wealth or equity out of the middle class. Maybe they will fail — especially if the investors and the homeowners get together. Whichever scenario plays out the system is going to crumble and society will be permanently tilted unless action is taken to slap down the financial moguls, investment bankers, insurers and others in the financial industry.

I’ve said it before — there isn’t enough money in the world to fix the problem we are in, we are not recovering, the situation is getting worse and if we don’t stop the foreclosures and evictions our entire society will destabilize. The ONLY way out of this is to put back the regulations that worked well enough, (Glass Steagel etc.) and build on those. We have lost control over our government to the financial sector. Like Dick Durbin, Senator from Illinois said, “They own the place.” Simon Johnson says in his blog, if you look at his slide projection that we are headed for a new loss in GDP of 40%. I think he is being charitable but I will defer to his greater knowledge. Across the globe, everyone knows we must break the back of the bank oligopoly that has taken control over our government. Whether we do that depends upon each and every reader, the decisions they make, the actions they take and remembering what being an American is all about. Marcy Kaptur is precisely correct when she says that President Obama needs to “change generals” in managing the financial crisis. We need to switch from a plan of reassurance to a plan of action.


What happened to the global economy and what we can do about it

Too Politically Connected To Fail In Any Crisis

Over the past 30 years Wall Street captured the thinking of official Washington, persuading policymakers on both sides of the aisle not to regulate (derivatives), to deregulate (Gramm-Leach-Bliley), not enforce existing safety and soundness regulations (VaR), and to stand idly by while millions of consumers were misled into life-ruining financial decisions (Alan Greenspan).

This was pervasive cultural capture or, to be blunter, mind control.  But when the crisis broke it was not enough.  Having powerful people generally on your side is not what you need when all hell breaks loose in financial markets.  Official decisions will be made fast, under great pressure, and by a small group of people standing up in the Oval Office.

If you run a big troubled bank, you need a man on the inside – someone who will take your calls late at night and rely on you for on the ground knowledge.  Preferably, this person should have little first-hand experience of the markets (it was hard to deceive JP Morgan and Benjamin Strong when they were deciding whom to save in 1907) and only a limited range of other contacts who could dispute your account of what is really needed.

Goldman Sachs, JPMorgan, and Citigroup, we learn today, have such a person: Tim Geithner, Secretary of the Treasury.

We already knew, from the NYT, that most of Geithner’s contacts during 2007 and 2008 were with a limited subset of the financial sector – primarily the big Wall Street players who were close to the New York Fed (including on its board).  And the announcement of his appointment was widely regarded as very good news for those specific firms.

But Geithner himself has always insisted that his policies are intended to help the entire financial system and thus the whole economy.

“SECRETARY TIMOTHY GEITHNER: I’ve been in public service all my life. I’ve spent all my life working in government on ways to make our financial system stronger, better economic policy for this country. That’s the only thing I’ve ever done. And I would never do anything and be part of any policy that’s designed to benefit some piece of our financial system. The only thing that we care about and the only obligation I have is try to make sure this financial system is doing a better job of meeting the needs of businesses and families across the country.”  Interview on Lehrer NewsHour, May 8, 2009

Geithner’s defenders insist that his specific contacts while President of the NY Fed were a function of that position; “he was only doing his job.”

But today’s AP report, based on looking at Geithner’s phone records, from the inauguration through July, suggest something else.  How can anyone build an accurate picture of conditions in the entire crisis-ridden financial sector primarily from talking to a few top bankers?

The list of phone calls is not the largest banks, because some of the biggest are hardly represented (e.g., Wells Fargo), it’s not the most troubled banks (e.g., Bank of America had little contact), and it’s not even investment banker-types who were central to the most stressed markets (Morgan Stanley was not in the inner loop).  And small and medium-sized banks (and others) always bristle at the suggestion that their interests are in alignment with those of, say, Goldman Sachs.

Geithner’s phone calls were primarily to and from people he knew well already – who had cultivated a relationship with him over the years, shared nonprofit board memberships, and participated in the same social activities.  These are close professional colleagues and in some cases, presumably, friends.

The Obama administration had to rescue large parts of the financial sector, given the situation they inherited.  But it absolutely did not have to run the rescue in this exact fashion – bending over backwards to be nice to leading bankers and allowing their banks to become even larger.   Saving top executives’ jobs under such circumstances is not best practice, it’s not what the US advises to other countries, it’s not what the US tells the IMF to implement when it helps clean up failed banking systems, and it’s not what the FDIC implements for failed banks under its auspices.

The idea that you could leave big US bank bosses in place (or let them get stronger politically) and do meaningful regulatory reform later has always seemed illusory – and this strategy now appears to be in serious trouble.  But presumably Mr. Geithner’s financial advisers told him this was the right thing to do.

By Simon Johnson

14 Responses

  1. the money is being less available and the recovering from this situation may not be an easy thing .

  2. “The Ascent of Money” talks about what Abby in CA mentioned… they’re called “economic hit men” and I never knew that such people/plans existed – SAP’s or Structural Assessment Programs I think they’re called.

    Also, for those that have an interest in reading my research paper entitled “What is MERS and why is it on my title” I have posted it on my blog – it is the first entry listed in the “Our Housing & Mortgage Crisis” category. Its best to view it with a Firefox Browser if at all possible. MSN has made it increasingly difficult for anyone to view the actual content on my page… I guess I’m a bit too controversial for their bandwidth!

  3. Dear Editor,

    Excellent post & I couldn’t agree more. I liken what we’re going through right now to a slow motion hurricane. We’re hunkered down, don’t know if it will kill us or if we’ll survive, and we all want it to be over soon. It’s truly an economic Katrina, nationwide. With 60 million homes deeded to MERS (and probably 75% of those underwater) it’s probable many homeowners could wind up with at least squatter’s rights to their homes (if they fight for their rights), the resulting in up-ending the economy. That may, however, be what it takes to rid the system of the so-called “toxic assets” and our only way forward. Thanks for all you do on this site.

  4. we are being set up by the international banking cartel who’s plans to devalue & destabilize the US dollar so as replace the current currency standard with
    “A New IMF CONTROLLED currency ”
    This lunacy is not so far fetched

  5. Let’s all file for Bankruptcy..everybody !..

    .In a nation wide protest to the ever increasing injustice committed on hard working Americans by the Four Bankers from Hell .. and our corrupted Govt. who have become like their owners ..the Government from Hell.

    Lets mail the Big Banks their cut up credit cards with a note…
    ” I am Mad as Hell ..and I am not taking it Anymore ..” .and stop paying those bank robbing , super high interest .

    Recently The Texas Governor threaten to break away from the Union…and become an independent state .
    Maybe he’s right ..maybe it’s time for the States to break away from the Wall Street owned Washington DC . its the Wall Street Bankers property anyway . .

    They Own it ! Senator ..I forgot his name…admitted it i In a brief TV interview … ” The Banks Own the Senate “..he said .

    I’ll bet that they own the House of Representatives and the White House.too .

    Let each State have its own banking , and credit card system .Break away from the corrupted ” Federal Reserve ”

    What is happening ? A Wall Street ” Coup d’etat ”
    The American People have lost representation in D.C.

    The real power is divided into the four Big Banks..JP Morgan Chase,, Well Fargo…Citi Group,…and Bank of America …

    We can’t just sit on our hands and keep taking this injustice..

    I filed bankruptcy last year .. it didn’t hurt..
    Not one more penny to these wicked bankers ..


  6. This way of capitalism, “the American way” it’s creating the “fetus” of an upcoming middle class economic revolution, we Americans don’t take crap from anybody in the world, and yet here we are grabbing our ankles for the very people that are supposed to “protect” us from the rest of the world, while American kids are dying abroad trying to protect us from the supposedly “REAL” evil. America, please listen!!!, we need to do something about this “serial economic rape” that our country is being a victim of, enough of this abuse! enough of this distortion of capitalism!!, enough of their dictatorial mentality!! this is NOT the way is supposed to work. We are not longer a capitalist country, we are now a country in financial decay!!. We must unite, not in arms, not with violence, not in a rampage to cause physical harm to anyone, but we must unite intellectually!!! we must unite in such way that defeat should not be possible! we must unite in a way that our walls become impenetrable by the corruption lingering in the American economic atmosphere, we must unite through the legal system and put it to work for us the way it was designed to, we must at once reinstate our beautiful America to it’s greatest shape, we must regain control of our lives, our finances, and our family’s future. We must again become Americans, and feel proud when we say it. not ashamed!! we must wake up from this American nightmare……….then…. we must again rebuild and become part of the once golden and precious American dream!!! , God’s divine ray of hope, still shines over our great nation…..the evil machine must be dismantled once and for all!! To Victory America!!!

  7. Marcus & ALL
    the massive Ponzi of Debt supported and fed by us unwitting homeowners & consumers(credit cards), may collapse soon.

    Think of Main Street American Homeowners as a big ship and the Marauding International Coalition of Big Banks as ‘electronic’ PIRATES!!

    They are PIRATES!!

    With pushes of their fingers on their iPhones, they are pillaging us all.

    We need to make them ‘walk the planks’!

  8. The whole damn system is corrupt as all hell. We’re all on a bob-sled to hell … enjoy the ride while it lasts. Soon none of us will be here anymore.

  9. L.Fitzgerald,


  10. Hey, where can I find one of these South Carolina “Specialty firms” that is selling houses around ME for $500 down, $300 per month? Seriously, If I can find one in my area *I’LL walk away from my existing home and mortgage – credit be damned – too!

  11. I have admired the Capitalistic system for many years . I studied Business in College.. After working many years as an employee I broke away and started my own business. I’ve failed 5 different times and had one success.

    .. 9 out of 10 start up business fail in less of a year. And the one that survived will most likely fail in less than 5 years . that’s the rate of failure ..based on statistics .

    So the great majority of start up entrepreneurs bite the dust quickly and return looking for a ” job” ..but..unfortunely after losing every thing . Every penny they had or borrowed …

    So the Capitalistic system I have experienced ..has made one small group of people billionaires , and the other 99 % into pawns.. working to make the 1% richer, and richer , and they still want more. ..they want it all .

    I have lost my love for a system that produces modern slavery .

    Capitalism produces greed , so Governments has to control it.
    Permit reasonable profits of course … but protecting us the pawns too..
    but the Government has been bought and paid for too by that 1 % ..

    The Health Insurance, the Drug Industries, Big Banks are lobbying to kill any law that could helps us .. .

    Is this the American Dream we brag about to other countries ? 1 % billionaires the remaining 99 %… pawns

    While families are been expelled from their homes ..the Government looks the other way and offers small token help..
    so they can say they are trying..

    When will the people get “mad as hell and not take anymore”

    I know I am Mad as Hell ..and I have become a Rebel against the status quo … .


  12. I think the problem may have been started when Nixon abolished the gold standard. How can they create money out of nothing; it is beyond belief. The current financial system is simply a pyramid scheme. The middle class is supporting the entire structure. But for how long can they continue to suck the blood of the masses?

    marcus @

  13. Neil and others: must get a copy of Ellen Hodgson Brown, JD book ‘The Web of Debt’…outstanding.

    Quote to Take note: Americans tend to identify with these Wall Street banks and transnational corporations because they have U.S. Addresses, but Bob Djurdjevic (Chronicles) warns that the international cartels do not necessarily have our best interests in mind. To the contrary, Main Street America appears to be their next target takeover……

    This book details accurately how the cartels and IMF have maruded around the globe, gone in & manipualted and then ruined smaller countires…devastated them & created more poor folks and taken the country’s assets.

    Doesn’t everyone on this site ‘feel’ the ‘shock’ of this upsurping?

    I am not sure having our government put back in place the Glass-Steagal etc. laws will do anything to stop the marauding international cartels and IMF.

    Get the book!! Amazon has a discount on it.
    You will be shocked. This is much bigger than just

  14. if your NOT part of the ACTIVE solution ,you ARE part of the problem…there is no middle ground..
    not a witch hunt but a CALLOUT for recourse & redress. let those that have not profited from the crisis move to the front of the line . this requires leadership, strength , resolve , common man morales . True Leaders are born, not made, not bought, and not afraid to do what is RIGHT or JUST. If the definition of right or just is required to be defined than those that are in question or need of definition ARE NOT a LEADER.
    Make those that would claim such a statement of not profiting to do so by personal income records , any of those refusing documentation of this will be discarded be found guilty of obstructing justice . if marsh law is still in effect.& i believe it has ben since WW2.. the powers that be must step up to address those accountable .starting @ the top of the financial food chain must 1st be examined to determine where&what their position & contribution to this crises was & is.
    reform will only follow DEMAND FOR REFORM!


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