For publishing this piece here on what caused the recession, which was caused by other factors than the “flash crash of 2008.”
Quoting Matt:
1. The FED kept interest rates too low for too long – This isn’t rocket science. Keeping interest rates artificially low led predictably to excessive credit and speculative asset bubbles — such as occurred in the housing market (this problem has not been fixed).
2. The expanded mandate of Fannie and Freddie – The housing collapse can very likely be traced back the Clinton administration’s pressuring of Fannie and Freddie to encourage more home buying. The Community Reinvestment Act, for example — in which banks were encouraged to people who normally would not be worthy of obtaining home loans — was especially pernicious. The CRA, of course, had been around for a long time prior to Clinton, but as Howard Husock noted in 2000, the Clinton Administration, “turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into one of the most powerful mandates shaping American cities.”
(Note: Anyone interested in learning more about Fannie and Freddie should read “Reckless Endangerment,” by Pulitzer Prize-winning business reporter and New York Times columnist Gretchen Morgenson, and housing finance expert Joshua Rosner.)
3. Mark-to-market accounting – This accounting device requires financial institutions to adjust their balance sheets and capital accounts whenever the value of an asset they own increases or decreases. The trouble with this is that it requires banks to show paper losses for assets they may have no plans to sell (in fact, the bank may be planning to wait for the price to increase prior to selling it). FDR suspended mark to market accounting in 1938, but unfortunately, the George W. Bush administration brought it back in 2007. As Steve Forbes wrote in 2009: “Of the more than $700 billion that financial institutions have written off, almost all of it has been book write-downs, not actual cash losses.” (The requirement has since been loosened.)
4. Repeal of the uptick rule – Also enacted by FDR, this says investors can’t short a stock unless it goes up in price. According to Investopedia: ”The uptick rule prevents short sellers from adding to the downward momentum when the price of an asset is already experiencing sharp declines.” In 2007, the SEC got rid of the rule, resulting in investors betting against the market, manipulating the market, and depressing stock prices. (Note: Like everything else on the list, some people dispute the notion that the uptick rule would have helped. Others argue that short sellers get a bum rap. For example, the last infamous CEO to complain about short sellers was Dick Fuld of Lehman Brothers. The company went bankrupt and short selling had nothing to do with the rapid decline of price.)
5. Repeal of Glass-Steagall – Enacted by FDR after the Great Depression, a main provision of Glass-Steagall was separating investment banking from commercial banking. But in 1999, the Gramm–Leach–Bliley Act (passed by a majority of Republicans and signed by Bill Clinton) repealed that provision. The problem, of course, is that this encouraged banks to be speculative — to take risks, knowing all along that the FDIC would insure their loss. (The notion that repealing Glass-Steagall contributed to the recession is disputed by some economists. Some would even argue that it helped. For example, when Bear Stearns and Merrill Lynch got into serious trouble, they were promptly acquired by J.P. Morgan and Bank of America. These rescues were possible only because banks could own full-service broker-dealers.)
So there you have it: Five things which (I, at least believe) contributed to the crisis.
Only thing I will add to this is that the CRA DID cause the housing bubble, because of what they added, which was the sub-prime clause that was added to that act. This caused a considerable amount of credit to given to those whom without said act, would never have been able to get said credit. This is called, “taking money from the people who have it and giving it to those who have not” or simply put; class warfare.
Furthermore, I am glad to see that Mr. Lewis does point out that Bush’s White House did have some input into the crash and recession. So many times, I get so frustrated with people on the right; who look at everything through a partisan lens and try to blame Obama or the Democrats only for the mess. Truth is, the Republicans screwed up royally too, with the things listed above and with their addiction to spending, which did not help either.
What burns my rather large behind is that both Republicans and Democrats both; instead of usually fixing the problem, they sit around and blame one other for the damned problem, which fixes absolutely nothing. This is why I despise partisan politics so much. Maybe if Republicans and Democrats had tried to work together more, we might could have staved off the recession. Nevertheless, that did not happen, because both sides knew that they could create a cottage industry out of blaming the other side.
….and that my friend is the much sad state of politics in this Country.