The Financial Crisis Was Entirely Foreseeable

Foreseeable or Not?

I noted in April:

Whenever there is a disaster, those responsible claim it was “unforeseeable” so as to escape blame.

For example:

  • It happened with 9/11

The big boys gamble with our lives and our livelihoods, because they make a killing by taking huge risks and cutting costs. And when things inevitably go South, they aren’t held responsible (other than a slap on the wrist), and may even be bailed out by the government.

But surely the financial crisis was different. After all, Wall Street executives and politicians say that the financial crisis wasn’t foreseeable. And see this.

Actually, it might have been slightly foreseeable for a little while before the financial crisis.

We’ve Known for Thousands of Years

We’ve known for literally thousands of years that debts need to be periodically written down, or the entire economy will collapse. And see this.

We’ve known for 1,900 years that rampant inequality destroys societies.

We’ve known for thousands of years that debasing currencies leads to economic collapse.

We’ve known for hundreds of years that the failure to punish financial fraud destroys economies.

We’ve known for hundreds of years that monopolies and the political influence which accompanies too much power in too few hands is dangerous for free markets.

We’ve known for hundreds of years that trust is vital for a healthy economy.

We’ve known since the 1930s Great Depression that separating depository banking from speculative investment banking is key to economic stability. See this, this, this and this.

We’ve known since 1988 that quantitative easing doesn’t work to rescue an ailing economy.

We’ve known since 1993 that derivatives such as credit default swaps – if not reined in – could take down the economy. And see this.

We’ve known since 1998 that crony capitalism destroys even the strongest economies, and that economies that are capitalist in name only need major reforms to create accountability and competitive markets.

We’ve known since 2007 or earlier that lax oversight of hedge funds could blow up the economy.

And we knew before the 2008 financial crash and subsequent bailouts that:

  • The easy credit policy of the Fed and other central banks, the failure to regulate the shadow banking system, and “the use of gimmicks and palliatives” by central banks hurt the economy
  • Anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts “will only make things worse”
  • Bailouts of big banks harm the economy
  • The Fed and other central banks were simply transferring risk from private banks to governments, which could lead to a sovereign debt crisis

Given the insane levels of debt, rampant inequality,  currency debasement, failure to punish financial fraud, growth of the too big to fails, repeal of Glass-Steagall, refusal to rein in derivatives, crony capitalism and other shenanigans … the financial crisis was entirely foreseeable.

This entry was posted in Business / Economics. Bookmark the permalink.
  • Well said, and compelling.

  • Austrian school economists, economic historians and other writers predicted the housing bubble. This article by Walter Block lists many articles with links that appeared in the years leading up to 2008:

  • Eric

    Must read article here: This is the Reuters re-hypothecation article. It does a great job explaining how the shadow economy works.

    Aside from the scandal that the article describes, something else occurred to me: The financial industry is minting its own money and redeeming it in the coin of the realm.

    Brokers get to create money in much the same way as banks, for the sake of argument call it “fake” money, which theoretically is okay because it doesn’t circulate in the real economy. And theoretically, were participants to close their positions, everything would unwind in an orderly fashion, so the real economy wouldn’t be hurt. The article claims that the amount of fake money is about 4 times the amount of “real” money, although I’ve heard as much as 10 times.

    However, the brokers’ commissions, fees, salaries, and bonuses are based on not just the amount of real money they trade, but also the amount of fake money they trade. So they’re making at least 4 times as much as they would if they were just trading on the real economy (i.e. performing a needed service). And their earnings are paid in real money. It’s like being able to take your Monopoly winnings to the bank. Sounds like a job for the Secret Service to me.

  • Benjamin Franklin

    George; I hope this is not too far off-topic Lately we’ve been having a 2nd honeymoon with Obama, with all the Teddy Roosevelt comparisons, and all.

    I’m not forgetting the more important of his capitulations. Send DHS to disrupt ‘Occupy’, and this…..

    “In recent days, more than 7,000 Obama supporters have organized on a social networking site on Obama’s own campaign Web site. They are calling on him to reverse his decision to endorse legislation supported by President George W. Bush to expand the government’s domestic spying powers while also providing legal protection to the telecommunications companies that worked with the National Security Agency’s domestic wiretapping program after the Sept. 11, 2001, attacks on the United States.”…..61755.html

    Dovetailing nicely with this is the subject of ‘retroactive immunity’ which entails much more for the War Criminals who have cock-slapped the Rule of Law when it suits them.…..le-of.html

    Obama is in campaign mode right now, and he talks real good when HE wants something from us.

  • Benjamin Franklin

    I guess you prefer not to have comments.

  • Tony N

    The Collapse of Communism: The Untold Story

  • Tony N

    I bet this loop hole in the 2005 Bankruptcy and Consumer protection reform law helped Pelosi make a killing off insider trading too , , because each time a bank collapsed Pelosi’s bank investments gained from these failed banks and investment firms assets and private citizen bank accounts that are seized in the Collapse which would make the Stock prices rise in the To Big to fail banks that Pelosi would have investments in this I Bet . I wonder if President Obama has Investments in the Multi-National banks that would be benefiting from this kind of Insider trading schemes like Pelosi is that 60 minutes reported on ??

    Corzine is Hiding the fact of what happened to the MF Global Money with this Loophole I bet too . You know what is Ironic about this is that Corzine when he was in the Senate voted against the 2005 Bankruptcy Bill that he NOW is using to hide the MF Global Money Loss behind and claim stupidity by .

    We can create more Jobs than either way by amending the 2005 Bankruptcy and Consumer Protection bill and close the Loop Hole that is allowing assets to be swallowed up by Derivatives holders like the Multi-National banks because the bill allows them to be first in line to seize these assets .
    Here is why this 2005 Bankruptcy and Consumer Protection Law is so bad for the Middle Class , all the small banks that have gone broke, see here, ,or will have had their assets and those assets that belong to Middle Class people swallowed up by the International Bankers because of this 2005 Bankruptcy Law and that Directly infringes on the State sovereignty and commerce laws right ?

  • The downturn was so predictable that I wrote a hardback, 278 page thesis on the subject and dispatched it to all of my clients. I outlined the phenomenon that I call The Classic Market ™and currently follow the underlying principles with enthusiasm. There is a rhythm to investment management and the property / bank liquidity / catastrophe was avoidable at the extreme; predictions were ignored by many that should have listened and acted decisively.