Frontline: The Warning

So much for change!  Why doesn’t Prez O do something NOW! Send this to your Congress PERSONS…....

Comment by gene from pequannock,nj — October 20, 2009 @ 8:02 pm

I think that this article misses the actual cause for the economic down turn. Moreover, I believe that you have hit the “nail on the head” about how society views the economic downturn -the result of under or faulty regulation. The problem was not regulation per se, it was over regulation and requirements. In the 1970’s (1977 to be precise), the Federal Government passed the Community Reinvestment Act. Basically, this legislation required that banks disengage from “Re-lining” and that they invest in sub-standard and “impoverished” communities. In addition, President Clinton in 1995 extended this legislation to allow an augmentation in the sub-prime market in order to, “provide equal housing to all.” This invasion of government into the private system (which was already overly regulated) brought about false risk systems. By ‘false risk systems’, I mean the fact that these sub-prime requirements and investment requirements were backed by the FHA and perpetuated by the demand brought about by Fannie Mae and CHA like: ACORN. This false risk incentive situation caused by the government and its regulation is what caused excessive risk to be assumed in the system, and since any rational self-interested person will seek to maximize his or her amount of resources -it follows that Bankers could not resist. However, this incentive would have never been there if it were not for the Federal Government got involved. And, just one more point, Rand held that all bubbles or recessions/depressions are caused by government interactions and interventions in the free system.
So, looks like Rand got it right.

Comment by john Piccolo — October 20, 2009 @ 8:34 pm

great show.  the arrogance, oh the arrogance.  and to now have the same arrogance running the financial arm or the government again is truly unsettling.  Our country is run by idiots, idiots who are so power hungry they cannot see beyond their bathroom mirrors.

Comment by d from st louis — October 20, 2009 @ 8:58 pm

Hey John Piccolo,
After reading your response, I can say this:
I would bet all my money you are a Republican?
Am I right?

Comment by Erik from California — October 21, 2009 @ 1:38 am

“The Warning” was absolutely correct in its diagnosis of the cause of the cause of the collapse of Wall Street that finally became visible in Oct. 2007. Allen Greenspan recently admitted that he “excessively relied on the self interests of the banks to do what was right.” Greenspan’s mistaken belief that “the free markets would properly clear out fraud” is a naive statement that ignores the fact that truly selfish people like Michael Milken and Bernie Madoff exist. The veil of secrecy around the $56 trillion credit default swap problem was finally pierced by Jim Cramer of Mad Money in Oct 2007. That problem was 10 times as big as the problem with subprime loans and had nothing to do with Acorn. This “recession” was directly caused by the financial melt down of Wall Street and their “secret club” that included officials in the Government. The suit that Procter and Gamble finally filed after they were defrauded by those that wrote credit default swaps shows that only corporate America, with their many corporate lawyers, had the tools to fight back. There were others executives on Wall Street in the 1990’s that warned that “credit default swaps” were a phony form of “investment insurance” that had “no real assets to back them up.” In other words, credit default swaps were a lie. Recent deregulation that allowed the merging of “investment banking” and the mortgage industry allowed the greed from Wall Street to spread into the previously stable mortgage industry. Firms like Bear Stearns had no interest in a 6% transaction at all. Their greed was only interested in the “fees” that they could take and then “sell the mortgage to some over seas sucker” sucker in a “securitized security” that no one understood. This is very similar to “the Keating 5 scandal” which showed how the Congress the Senate actually thwarted the regulators and protected their contributors.

Comment by David G, Tuttle from Hampton, Va — October 21, 2009 @ 3:29 am

Brooksley Born for President!  She is honest and gutsy, a rare combination. Why in God’s name did Obama appoint Geithner, Summers and all the other high-falutin’ criminals back into the same positions they had wherein they managed to ruin the economy in the name of a silly, twerpish charlatan named Ayn Rand and her fool of a follower Greenspan after all the damage these “ideologues” managed to do to the United States of America, and to the world, in the name of following a sort of religious idiocy by such a false prophet as Rand?  Even the Mafia has more ethics and morality than do these self-appointed “Lords of the Universe.”

Comment by Lorraine Stone from stone3492@hotmail.com — October 21, 2009 @ 5:34 am

Outstanding program. It lays bear the need for empowering by real regulation of the industry/Wall Street by such agencies as the CFTC. Thank you Brooksley Born’s for all of your efforts. The central and critical issue placed before the viewers is the public need to know when banks or financial institutions are hedging their risky loans of any type, and who is insuring those risky loans, so that the world and market place know the true financial conditions of that bank or financial institution at any given time, so that an informed business risk assessment can be made regarding the true financial condition of the bank or financial institution before investing or doing business with any such Bank or financial institution. 

Thank You Frontline for again delivering the Truth.

Comment by V. E. Ramirez from San Diego — October 21, 2009 @ 6:23 am

At www.worldreports.org the financial fraud that was the real cause of the economic collapse has been documented since 2006. It is explained as an ongoing criminality to take down the USA that has been ongoing since the end of WWII.

Comment by jeanruss — October 21, 2009 @ 7:39 am

john…lemme get this right…the bankers “could not resist” because of “rational” self-interest and the govt forced banks to make these toxic sub-prime loans.  Soooo….if the govt wasn’t involved, then the bankers would STILL have made these loans since it was profitable and in their best interest??

HUH??

Comment by ed crist from sarver, pa — October 21, 2009 @ 8:10 am

d….you’re right…since the govt is run by corporations, then that means these big banks are run by idiots.

Comment by ed crist from sarver, pa — October 21, 2009 @ 8:11 am

Your analysis commits the fallacy of Begging the Question. You *assume* the cause of the economic debacle was laissez-faire and then use that(absurd) assumption to conclude that the laissez-faire advocated by Ayn Rand was the cause of the debacle.

As you quote Rand explaining, laissez-faire means the complete separation of state and economics. That means: no such agency as the Federal Reserve, no FDIC, no Fannie & Freddie, no Community Reinvestment act, and none of the 51,000 regulations that were *added* between 1995 and 2007 (source: Competitive Enterprise Institute).

Isn’t it obvious that, since at least the New Deal, we’ve had a mixed economy—part capitalist, part government controls? If so, you can’t just assume that the problems that arise are the result of the capitalist elements rather than the statist ones.

There are very strong arguments to support the claim that our economic problems are due to government interference in the market. Greenspan used to know these arguments, but when he joined the regulatory bureaucrats, becoming head of an agency that capitalism wouldn’t permit, he fried that knowledge out of his brain. And became not an Objectivist but a subjectivist.

And, no, I’m not a Republican. I’m an Objectivist.

Comment by Harry Binswanger from New York City — October 21, 2009 @ 10:37 am

interesting….between the great depression and the 80’s, our economy grew quite well, high taxes on the very wealthy, good paying union jobs, strong banking regulations, a thriving middle class.  After we were told that de-regulation was the answer to our problems (which problems, I’m not sure)we proceeded to deregulate.  What do we have now?  1/2 of our manufacturing is gone.  Wages have remained stagnant for working folks. Profits and productivity are way up, but wages didn’t follow along.  Personal and federal debt skyrocketed.  CEO’s went from making 30 times as much as the average floor worker to over 400 times as much.  The S&L Bailout…the Japanese banking crisis, the Mexican bail out, the derivatives crisis, the credit crisis, the….ok, ok.  Now tell me how it is that over the past 30 years we DE-regulated more and more and yet don’t see the free market doing a good job of correctint itself?  Please note that I FIRMLY believe that our representatives are BOUGHT AND PAID for by big banks and corporate interests.

But naked, self interest (Ryand’s objectivism) doesn’t keep short term greed and avarice from ruling the day.

Comment by ed crist from sarver, pa — October 21, 2009 @ 11:09 am

To those wishing to point blame at Republicans or Democrats. It seems all have been a part of the derivities fraud and have all filled their pockets, some more so than others. So instead of pointing blame lets demand a change. It’s our children and our childrens children who will pay the penalty for this wrong doing. Vote out the politicians that support unregulated derivities and lets publically hang the likes of Greenspan, Summers and Rubin.

Comment by Curtis from Denver, Co. — October 21, 2009 @ 12:05 pm

I agree with Mr Binswanger that there is no separation between state and economics, but it has been like that even longer than he says. I say it has been like that since 1913 when the FED and the income tax were created, or 1890’s when the antitrust laws started to take effect. And is is a moot point as to whether the corporations buy the politicians or whether the politicians extort the corporations. Remember, the politicians have the guns, the big guns.

Comment by JackDoitCrawford from Silver Spring Crowne Plaza — October 21, 2009 @ 12:10 pm

How come we are blaming the author Ayn Rand and not say the economist, John Keynes? As Harry Binswanger noted, we have been a centrally planned mixed economy for most of our nations history. Why blame “free markets” if the markets have never been free?

Oh right, I know why, because “According to this week’s episode of Frontline, faith in such “separation” led directly to Wall Street’s recent collapse.”

Well I am glad at least a TV show, funded by the government, thinks itself is not the problem. Imagine that! Next we’ll hear statists say de-regulation was the problem! Imagine that…

Thank GOD for PBS!

Comment by John Galt — October 21, 2009 @ 1:43 pm

The program was great, but does not tell the entire story.  It covers only the failure to regulate deriviatives, as denied by the “powers that be” (Greenspan, Summers, Rubin triumverate).  What it displays is the fact that Reagan empowered the financial plutocracy, and got things headed the wrong way.  Glass-Steagal played a major role under the de-regulatory frenzy, and has enabled an embedding of the plutocracy to perminence by the actions taken by Paulson and Bernanke to prop up the plutocrats at the cost of the economy and rank and file taxpayers.

What it showed more than anything is the grand conpiracy between Washington and Wall Street, which remains more potent than ever, now that we have a perminently broken ecomony in which the rich get richer, and everyone else gets poorer or goes broke.  From all that has been written, and what history portrays, I’m not a nutcase “conpiratist”, but just telling it like it is.

Comment by Bayard Waterbury from Alpharetta, Georgia — October 21, 2009 @ 5:23 pm

Hmmmm….Harding, Coolidge, Hoover, roaring 20’s, no banking regulation, wild speculation, huge margins, CRASH and DEPRESSION.

FDR…FDIC, Glass-Steagle, SEC, WWII (Huge stimulus), 91% tax on the wealthy, 50’s, 60’s, 70’s…NO BANKING CRISIS….NO BUBBLES OR BUSTS…a growing middle class,good wages/benefits (unions), a strong manufacturing sector, tariffs

Reagan…union busting, lowered taxes for the rich and RAISED taxes on working people (inrease in payroll taxes), STARWARS, 3.75 TRILLION dollar debt, de-regulation, S&L crisis, market crash, flat wages, jobs shipped overseas

Clinton…NAFTA/GATT/WTO, end of welfare as we know it, repeal of banking regs…he did raise taxes on the wealthy

on…and on…and on

Comment by Ed from Sarver, PA — October 21, 2009 @ 6:12 pm

Let me first say that I am not a Republican nor am I an objectivist. Politically I follow the Libertarian movement, and, fiscally or economically I adhere to the Chicago School (and sometimes the Austrian). David, I think that you are right about there being an element of greed that has contributed to the meltdown, and I also agree with you that there are -even if the case you provided is not evidentially supported- certain secret groups and actions that are present in every economic system. However, you are wrong on several fundamental issue -economic rationalism. Any economic system that perpetuates a stable system of equilibria will never establish a systemic contradiction. Like Adam Smith points out in his theory of Moral Sentiments that rational action is precisely that -rational, and that any emotion or integration of some foreign element into one’s repose contradicts that person’s dignity. The economic system is the same… it must be ran upon the rules inherent to the game the system plays; which, for capitalism, is namely, greed and self-interest. Chaos brought about by competition fuels itself, and any element that limits that, will be removed by the system.
The regulations that were imposed by the 1977 CRA lead to the ability for bankers to utilize the sub-prime system to fuel the ability to hedge and initiate credit swaps (especially since the guarantee to purchase mortgage backed securities allowed for the ability of large corporations to take advantage of more risky investments in the underlying markets). And additional point that is of interest and importance: every time government creates a new regulation in a capitalist system a new market that is parasitic to capitalism pops up and then leads to future instability due to the false foundation of that system.
Ed Crist, yes, the bankers would not have take such action to make profit if there was risk and certain systemic implications.
And I think that Harry Binswanger makes some good points about Greenspa; it is widely known that he underestimated the market to regulate, but this “estimation” was the result of lack of foresight due to all the false systems propped up by the regulation and government intervention.
(It is interesting that the most fraud, criminality, and suffering are caused in communist and socialist economic systems, and still people blame capitalism which relatively speaking is more productive, fair, and efficient)

Comment by John Piccolo — October 21, 2009 @ 7:04 pm

Bayard Waterbury,
I don’t think that you have said anything meaningful -you argument sounded like something I would expect Rush to say. The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation and augment regulation of commercial banks. This act worked in conjunction with the CRA to help establish incentive for the Banking industry to accept government involvement more readily or face punishments -so, this is an example of more government involvement leading to false micro systems in the economy and not the economy leading to more self-destruction.

Comment by john Piccolo — October 21, 2009 @ 7:09 pm

Ed,
Wrong, the Depression and the “roaring 20’s” was not the result of no regulation it was the 77% income tax to finance WWI, the recession of 20,21, and then the dropping of interest rates to almost zero by the Fed. Reserve, which favored large banks and allowed them the capital to speculate and attempt to recuperate gains lost in the recession. The over-speculation was the result by the regulation and Reserve’s oversight (monetary policy). FDR’s policies, as Friedman puts it, “we the cause for which the crisis of the 70’s and 80’s were actualized.” And, during Jimmy Carter’s last year in office (1980), inflation averaged 12.5%, compared to 4.4% during Reagan’s last year in office (1988). Over those eight years, the unemployment rate declined from 7.1% to 5.5%. Reagan implemented policies based on supply-side economics and advocated a classical liberal and laissez-faire philosophy, seeking to stimulate the economy with large, across-the-board tax cuts. Citing the economic theories of Arthur Laffer, Reagan promoted the proposed tax cuts as potentially stimulating the economy enough to expand the tax base, offsetting the revenue loss due to reduced rates of taxation, a theory that entered political discussion as the Laffer curve. Federal income tax rates were lowered significantly with the signing of the bipartisan Economic Recovery Tax Act of 1981. Real gross domestic product (GDP) growth recovered strongly after the 1982 recession and grew during his eight years in office at an annual rate of 3.4% per year. Unemployment peaked at 10.8% percent in December 1982—higher than any time since the Great Depression—then dropped during the rest of Reagan’s presidency. Sixteen million new jobs were created, while inflation significantly decrease. The final point, Ed, is that some have argued that his regulation stance on the Savings and Loan industries was the cause for its demise, but this is very under supported and speculative -some economist argue that Carter’s policies on taxation and regulation (CRA, CRT) and his raising of taxes were to fuel over-speculation and illicit mortgage exchanges (it might be important to note that several Nobel Prize economist say that the boom of the 1990’s was established by direct result of Reagan’s deregulation and low taxation policies). Clinton made perhaps the worst mistake -not considering FDR- by allowing A.R.M loans to be backed by Fannie Mae and FHA -these were the cause of the current crisis.
on… and… on… and on… as you would say.
(People really need to do their homework)

Comment by john Piccolo — October 21, 2009 @ 8:27 pm

Alan Greenspan is being portrayed in the media as an advocate of Ayn Rand’s political philosophy, which is claimed by leftists to have caused the housing market collapse and the accompanying economic downturn.

However, while Greenspan may have agreed with Rand’s philosophy decades ago, it is an indisputable fact that he has not subscribed to her ideas for years - certainly not since he became became Fed Chairman, i.e., the nation’s money supply “czar”. See http://blog.aynrandcenter.org/alan-greenspan-isnt-a-capitalist-but-he-plays-one-in-the-media/
for the dirty details of Greenspan’s real beliefs and actions.

Comment by Mike Vengrow from San Diego, CA — October 21, 2009 @ 11:06 pm

I agree with Dr. Binswanger. As Ayn Rand noted, what is needed is a separation between market and state just as there is between church and state. No government is morally justified in the infringement of an individual’s rights. In a social context this means the absolutism of property rights. Property rights are the only implementation to all other rights in a social setting.

What would this mean in practice? It would mean no lobbyists, no government handouts, no “crony capitalism”, no corporations buying votes in Congress. In essence it would mean the institution of justice where all are equal before the law.

You can’t have your cake and eat it too. You can’t call for regulation and then demand that individuals not protect their businesses from unjust competition caused by government monopolies and favoritism.

Comment by Michael Caution from Columbus, OH — October 21, 2009 @ 11:18 pm

John….are you saying that the banks knew that the govt would bail them out and that’s what caused them to take the risks?  I’m trying to understand this…the investors demanded more and more bundled mortgage securities….so lenders decided to push sub-prime (NINA, NINJA, whatever) loans to anyone who would sign on the dotted line…then the lenders sold these to be bundled as securities and then chopped up and sold to other investors…Moody’s and other ratings agencies gave them AAA ratings (either knowing they were toxic or not)...AIG sells insurance to back these investments…home prices take a nosedive, the investments devalue, credit freezes up, AIG is about to under and take everyone with them, Lehman Bros is told to go take a hike….

If you’re saying that the banks took these risks knowing the govt would bail them out, remember that many of their shareholders were wiped out even WITH the bailout.

Please pinpoint why it was the fed govt that made all of this happen.  What “gun” was put to the heads of these banks and financial firms that MADE them sell these loans, package these worthless securities, and rate them as AAA.

Comment by ed crist from sarver, pa — October 22, 2009 @ 10:33 am

If anyone is interested in the detailed causes of the crises, banker John Allison gives an excellent presentation on the subject:

http://www.aynrand.org/site/PageServer?pagename=reg_ls_financial_crisis

Comment by Michael Caution from Columbus, OH — October 22, 2009 @ 1:06 pm

Ed,
I never said that banks new the government would back them (although I think that some might have made the type of inference). What I said is that large systemic instability and false economic platforms are usually the result of recessions and depressions. Since, the government required banks to lend, basically, to people who could not and should not have been able to purchase homes, the result was a factual system that brought about false risk-incentives for investment banks. These type of false “opportunities” would have never been actualized to the extent in which they were, were it not for the CRA and the other “forced” regulation by the Federal Government. Thus, as it seems clear, that the whole crisis, or at least, the severity of it was caused by the Fed’s hand in the markets. Moreover, you are forgetting that Fannie Mae and Freddie Mac we strong systemic operators in allowing mortgage back securities, especially the sub-prime arms that they backed on FHA’s bill, to be sold to investment banks and packaged (FM and FM are both GSE’s). The rating for many of these securities (although many were not AAA -the banks and package were rating specific) were high due to the backing by large GSE and Federal housing programs like FHA’s involvement in backing the sub-primes for over 25 years! Obviously, if you have entities like FHA or large multi-billion dollar GSE’s backing a large amount of the paper you are betting on, what would you rate that paper as? Obviously ,(and this gets back to the theory that the market is inherently egotistic and seeks only self-interest)  you will rate those as high and sell like a mad man to make money. So, I am not saying that the banks are 100% free of the responsibility, but I am saying that they would not have engaged in such practices were it not for the regulations made by the government.

Comment by john Piccolo — October 22, 2009 @ 3:38 pm

John…ok, because I truly want to understand the position you’re taking, let me see if I get this right…lenders were forced to make loans to people who couldn’t afford them because the govt had a gun to their heads in the form of regulation? Can you lay out what these lenders would have done differently had the regulation not existed? I’m trying to put together cause and effect using your model of what happened.

Comment by ed crist from sarver, pa — October 23, 2009 @ 5:28 am

John Piccolo is blaming the government for forcing these banks to take all the risks? Bah hahahahahah! OMG, too much. Well John, it’s called LOOPHOLES. The Banks and all the other greedy schmucks on Wall Street loved the deregulation of it all and looked for the loopholes to cover themselves. It wasn’t the poor/middle class person who took out a loan they couldn’t afford that is to blame. The lenders were EAGER to loan to anyone who wanted a mortgage because they all knew that defaulting on these loans meant big bucks for them down the road. Offshore hedgefunds were all the rage and one estimate has the current figure at $600 TRILLION. All based on zero of course! Wall Street created a House of Cards and it will fall over. What we witnessed last year (run on the banks in September 2008 where $550,000,000,000 was taken out in 90 MINUTES) will be nothing. The greedy sons of bee-otches on Wall Street are to blame. Our government is not (though they could have written tighter laws, but when you’re deregulating, why do that? Republican Phil Gramm needs to take some blame here in deregulating CDS under Clinton).

No one forced the banks/lenders to do anything. They took advantage of the system and they had George Bush telling Americans that we are an ownership society and to get that house any way you can! They couldn’t wait to oblige.

Comment by Kay from Maine — October 23, 2009 @ 5:51 pm

Ed,
I will not repeat myself. It is overly obvious what I am advocated was the efficient cause behind all major recessions -regulation. Every time that (and the vast majority of economist assent to this) there is a regulation propped up in the economy there is a new -micro-economy created. The result is that there are now two contradictory systems attempting to act harmoniously with one another. You must either embrace consecutive economic failure or deny government involvement.

Kay,
First, I think that some of you information is seriously erroneous -from your argument’s tone, however, I don’t expect anything less from you. Bush did want everyone to own a home, and that was not the correct economic view to have. However, it was not he that was responsible for the melt-down on Wall-street, it was a succession of alternative regulations and then deregulation; starting with the CRA (I think that Clinton’s CRA was much more destructive). So, I think I would brush up on your economics if I were you (I suggest Hayak, Friedman, and some classics like Mill or Smith).
And to address you almost religious respect for government. I think that anyone that holds that the government is innocent from this situation is living a pernicious fantasy - and should wake up quickly and realize that much of the collective world suffering, economic failures, wars, and the like, are the result of Government’s interventions into the private society and life of the individual.

Comment by John Piccolo — October 23, 2009 @ 9:56 pm

Kay,
By the way, I actually am advocating the opposite to the first proposition that you asserted: “John is blaming the government for forcing these banks to take all the risks”. I have continuously held that they too no risk, or that the risk had been mitigated via regulation and the backing of Governmental Enterprises (GSE).

Comment by John Piccolo — October 23, 2009 @ 9:59 pm

john…i appreciate your attempting to respond to my questions and, yes, perhaps I’m not seeing what you see…but I’ve read enough about objectivism to come to one conclusion…I cannot accept a philosophy that embraces the notion of “I’ve got mine, now screw everyone else”. You provide no evidence that this philosophy is working anywhere in the world, or even anywhere in history. Yet you embrace it as the ultimate asnwer to mankinds societal and economic woes. Sure, nothing employed now works perfectly…it is a work in progress. But objectivism asks to throw out the baby with the bathwater and let the strongest survive the bloodletting.

Sorry, but that’s insane.

Comment by Ed from Sarver, PA — October 24, 2009 @ 9:23 am

Ed,
I do not embrace Objectivism, as Rand calls it. Nor do I advocate he views of selfishness (i.e. you have yours and I have mine). What I do agree with, however, is that individual freedom must be left alone. And that the Governments usually, but not always,  is the cause of most economic, social and -obviously here- political problems. So, I guess you could say I agree with her economically, but not socially.

Comment by John Piccolo — October 24, 2009 @ 1:56 pm

I too believe in individual freedom. But I also recognize that economically, without government setting the rules of the game, it would be like a football game with no refs, or rules.  Markets exist because of “we the people” (govt). Not the other way around.  We the people allow markets to exist…provide judicial protection (contract laws, limited liability protection)...provide infrastructure likes roads, water, electricity, education…without rules, we get monopolies, concentrated wealth, a shrinking middle class…kinds what we have now.  Government must play the role of representing we the people and referee…sadly, as Jefferson feared, our govt has become pawns of the very wealthy.

Add to this that many citizens gladly pounce only on govt as the sole problem and give the corporate elites a complete pass. 1% of our citizens own more than 90% of all the wealth in this country, yet many Americans believe that they too, can acheive that same status.  Jefferson railed against the concentration of wealth as more dangerous to our nation than any standing army.

My personal hope is that we can do the one thing that would turn this disaster around…go to public funding of all federal elections.  Get the $$$ out of politics and let good, honest, honorable people into govt.  I don’t see this happening at all.

Comment by Ed from Sarver, PA — October 24, 2009 @ 2:34 pm