Economic meltdown of 2008
There were many factors that contributed to the economic collapse of 2008. Much of the blame lies with President Bill Clinton. President Bush was made aware of the looming crisis, but failed to address the problems before it was too late.
Clinton is responsible for three pieces of legislation that played a major role in the crash of 2008:
• the Financial Services Modernization Act of 1999
• the Commodity Futures Modernization Act of 2000
• turned the Community Reinvestment Act, a once-obscure and lightly enforced banking regulation law, into a vast extortion scheme against the nation's banks.These three changes helped spawn a massive expansion in the shadow banking system between 2000 and the meltdown of 2008.
• Subprime loans. These loans were issued to borrowers who could not qualify for ordinary "prime" mortgages because of low incomes or tarnished credit. A high default rate on these loans was a big factor.
• Lack of ethics. Ethics is more important in capitalism then socialism.
• the Financial Services Modernization Act of 1999. this bill repealed part of the Glass–Steagall Act of 1933, removing barriers in the market among banking companies, securities companies and insurance companies that prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and an insurance company. With the passage of the Financial Services Modernization Act, commercial banks, investment banks, securities firms, and insurance companies were allowed to consolidate.
A year before the law was passed, Citicorp, a commercial bank holding company, merged with the insurance company Travelers Group in 1998 to form the conglomerate Citigroup, a corporation combining banking, securities and insurance services under a house of brands that included Citibank, Smith Barney, Primerica, and Travelers. Because this merger was a violation of the Glass–Steagall Act and the Bank Holding Company Act of 1956, the Federal Reserve gave Citigroup a temporary waiver in September 1998. Less than a year later, Financial Services Modernization Act was passed to legalize these types of mergers on a permanent basis. The law also repealed Glass–Steagall's conflict of interest prohibitions "against simultaneous service by any officer, director, or employee of a securities firm as an officer, director, or employee of any member bank."
• Commodity Futures Modernization Act of 2000 - This bill essentially deregulated the entire derivatives market, including energy derivatives, as abused by Enron, and credit-default swaps, which allowed AIG Financial Products to binge on unlimited amounts of risk.
• the Community Reinvestment Act - Originally passed in 1977, this bill was designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.
Clinton politicized the CRA which resulted in shakedowns by CRA activists. The Senate Banking Committee has estimated that $9.5 billion so far has gone to pay for services and salaries to activist groups involved in these shakedowns. To deal with such groups and to produce CRA compliance data for regulators, banks routinely establish separate CRA departments. A CRA consultant industry has sprung up to assist them. New financial-services firms offer to help banks that think they have a CRA problem make quick "investments" in packaged portfolios of CRA loans to get into compliance.
Defenders of the CRA claim a 1977 law could not be a factor in the meltdown of 2008. These defenders are deliberately ignoring the new regulations that were put into place by Clinton.
• The shadow banking system is the collection of non-bank financial intermediaries that provide services similar to conventional banks. It includes entities such as hedge funds, money market funds, unlisted derivatives and structured investment vehicles (SIV). Many "shadow bank" like institutions and vehicles emerged in American and European markets between the years 2000 and 2008. The birth of the shadow banking system began with the development of money market funds in the 1970s – which are not regulated as banks. The shadow banking system started quietly in the mid-1970s, accelerating through the 1980s and 1990s, and then exploded in the first decade of this century.The most visible example of the risks involved in the shadow banking system in the U.S. was the Enron scandal, where structured investment vehicles (SIVs) were used to hide losses off the balance sheet.
Economist Paul Krugman described the run on the shadow banking system as the "core of what happened" to cause the crisis. "As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realized that they were re-creating the kind of financial vulnerability that made the Great Depression possible—and they should have responded by extending regulations and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank." He referred to this lack of controls as "malign neglect."
The shadow banking system grew from an estimated $27 trillion in 2002 to $60 trillion in 2007 In 2011, the shadow banking industry had grown to about $67 trillion globally, $6 trillion bigger than previously thought, leading global regulators to seek more oversight of financial transactions that fall outside traditional oversight. America had the largest shadow banking system, with assets of $23 trillion in 2011, followed by the Europe with $22 trillion and the United Kingdom at $9 trillion.
What’s surprising is that four years after the crisis, shadow banking remains a huge force. International regulators are seeking ways to control the $67 trillion shadow banking industry without limiting its usefulness. They hope to finalize new regulations by September 2013.
7. http://www.ft.com/intl/cms/s/0/42827c50-abfd-11dc-82f0-0000779fd2ac.html#axzz2H1796CUJ 8. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1323190
9. Taxation and the Financial Crisis, edited by Julian S. Alworth, Giampaolo Arachi, Oxford University Press 2012, p 192
11. The Return of Depression Economics and the Crisis of 2008