Econopocalypse worse for economy than 9/11

It's official: the financial collapse caused by inadequate banking regulation have harmed America's economy worse than the 9/11 attacks did:

The Commerce Department said Friday that retail sales fell by 2.8 percent last month, surpassing the old mark of a 2.65 percent drop in November 2001 in the wake of the terrorist attacks that year.

U.S. retail sales collapse (via Beyond the Beyond)

I write books. My latest is a YA science fiction novel called Homeland (it's the sequel to Little Brother). More books: Rapture of the Nerds (a novel, with Charlie Stross); With a Little Help (short stories); and The Great Big Beautiful Tomorrow (novella and nonfic). I speak all over the place and I tweet and tumble, too.

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ill lich

The causes of the current economic crisis are so involved and incomprehensible to most Americans (indeed to most human beings in general) that it’s easy for talking-head-robot-human-mouthpieces on TV to lay blame at whoever they want, or rather whoever they think their audience wants. Rush Limbaugh can convince 20 million listeners that it’s the Democrats fault simply because “they supported home loans for the poor who then defaulted”, or because one of Obama’s advisers worked for Freddie mac. It’s reasonable enough if you want to believe it.

The GOP has always been against market regulations, and the most convincing argument for what we are seeing involves the repeal of regulations (at the behest of the credit industry) that had been in place since the 1930′s. I seem to remember something important from history class about the 1930′s. . . now what was it . . . ?
SKR

@ Decius #13

That was a great link. I particularly like the point about Greenspan’s Fed rate being a major component.
——–

It seems as though there was a lot of fraud along the way that was and is illeagal. Could the enforcement of existing laws put the brakes on this mess, without having to resort to excessive new regulation?

With regards to profit motive, isn’t profit supposed to be tempered by risk, and why didn’t that happen? Unless, they (bankers) believed either a: the loans really weren’t that risky (bad decision), or b: the risk would be ameliorated by the government (market distortion).

It seems to me that the public is letting Washington off easy compared to Wall St. Not that Wall St. is faultless mind you.
Takuan

what? you mean how the SCC that bent the rules for the lately bankrupt big boys were all Bush appointees?
scionofgrace

To be honest, I don’t think there’s a single person in the developed world who isn’t in some way responsible for this, from dishonest CEOs on down to gullible consumers. Except maybe the Amish. In any case, the economic collapse seems to me to be exactly as contagious as the greed that caused it.
decius

@SKR

1. I have no idea if present regulations are sufficient if enforced sufficiently. Thats an incredibly complicated question.

2. A. Bad decision. The system for assessing risk was broken, because the people who bore the risk were greatly abstracted from the people who assessed it, and the people who assessed it were not required to do a very good job. Basically, loan originators wouldn’t be held responsible for defaults on loans unless it occurred within the first 6 months of the loan, but the loans were often option ARMs with really low teaser payments that reset with huge increases after a few years. The loans were packed into mortgage backed securities that were given AAA ratings, meaning low risk, when in fact they were high risk.

Basically, the market was unleashed to create innovative securities products, and the products they created just blew up in everyone’s faces. People with money trusted the wall street institutions, and those institutions utterly failed to protect them. They are simply not going to be given the same amount of trust again in the future. Those who are still chanting “laissez faire” have little to no credibility in the face of these events. These institutions, whats left of them, are going to be reigned in.

3. There were several facets to McCain’s failure in the recent election but the economy was certainly one of them. In effect, the entire management of the executive branch of the federal government was just fired. What else do you want? A fillibuster proof majority for Dems in the Senate is the only thing left in the box. Its an almost total political reversal from the situation 4 years ago.
Ugly Canuck

Lesson: Do not privatize the creation of Money.
Privatize the creation of money, and then do an Enron…that’s about it ,isn’t it?
a_user

I think it’s more to with not voting idiots into government
MarlboroTestMonkey7

In my eyes
Indisposed
In disguise
As no one knows
Hides the face
Lies the snake
The sun
In my disgrace
Boiling heat
Summer stench
neath the black
The sky looks dead
Call my name
Through the cream
And Ill hear you
Scream again

Black hole sun
Wont you come
And wash away the rain
Black hole sun
Wont you come
Wont you come
Modusoperandi

The problem, I think, is that no one is blaming the right people. That’s right; the Amish.
SKR

@ Decius,

that was a really cogent reply, thanks.

on point 3,

I’m not sure if a repudiation of the Bush Administration gets to the heart of the matter. The major banking deregulation occured under Clinton, yet Bush is the one being blamed since it happened under his watch. I’m not saying he is blameless, just that the blame should be assessed in a less partisan way. It seems as though people are paying more attention to the rhetoric from the politicians that lay blame at the feet of the other side. This would be in contrast to an argument that would lay blame with excessive government manipulation in general, which seems to be completely out of favor right now. (the argument not the manipulation)
help i cant comfirm my username themelonbread

@#1: What does that have to do with anything? This is about investors gambling other people’s money with no oversight.

But privatized money would be a great thing. We’re funding our wars and hiding our defecit with the extra money that the Fed is printing at the cost of the dollar’s worth, which only exacerbates the situation. I’d rather have at least 2 private companies issue their own money at their own risk and with no temptation to degrade their own money than to have a perpetual cycle of recessions and real wages always dropping because Cheney wants to give expensive no-bid contracts to Halliburton.
gollux

The idiots in office had less to do with this one, unless you can count in the idiots being the ones in office for the last eighteen years. This thing was a long time in coming and the Privitization of the Creation of Money comment was more spot on. When you have a whole system that things it can create wealth out of thin air, eventually you find out that the value is a space vacuum and it implodes. Derivatives and CDS were exactly as Warren Buffet called it, economic WMD’s.
Teresa Nielsen Hayden / Moderator

Privatize the creation of money? You mean, all these institutions like Enron, Bear Sterns, and Lehman Bros. could have been floating their own currency, on top of everything else they were doing? What a missed opportunity!

Decius @13: Bravo. Good link.

SKR:

Could the enforcement of existing laws put the brakes on this mess, without having to resort to excessive new regulation?

No. Essential regulations were dismantled. What we’re now seeing are the results of that deregulation.

The same thing happened in the 1980s with the Savings and Loan Crisis: financial institutions were set loose to develop creative, new, unsupervised lines of business. Business ballooned, then collapsed. Then the U.S. taxpayers got stuck paying for it. It was hideously expensive, and a lot of innocent people suffered.

The Savings and Loan Crisis is why I have no sympathy for the deregulators and balloonists who caused the current crisis. They watched it all happen during the 80s, then turned around and did the same thing again.

I’m betting that they all fall back on the same “I was stupid and incompetent” defense used by Enron’s executives. Our legal system is merciful to the stupid and incompetent, and it’s very difficult to prove that someone was actually competent and had criminal intentions.
Guesstimate Jones

I look at it this way: In order to limit the economic damage inflicted by 9/11, the Bush administration leaned on the Fed to keep interest rates artificially low, thereby enabling the economy to defer the losses. This same low-rate climate, coupled with weak governmental oversight of the loan industry, allowed housing prices to inflate to an unsustainable level…but in order to keep that inflation from spilling out to the rest of the economy, they had to raise rates again, just as the subprime loans were starting to reset. Spread the risk around from that, with Credit Default Swaps, and you have the mess were in, now.

So yes, you can blame it on the Bush administration
Anonymous

Oh c’mon. This is just last-minute profit-taking that’s been on the agenda for six years at least, maybe more.

I read the 1st draft bailout bill (3 pages), skimmed the second (102 pages) and threw up my hands in disgust at the third (looked to be around 600, although officially it was 450 something).

The first bill was obviously designed to create a market panic and was not supposed to pass (although it almost did, because our representatives have stopped even pretending to represent us (and we re-elect them anyway)). Go read it, and then try to tell me that was supposed to pass while keeping a straight face.

The petro-dollar is dead; there’s no resurrecting it at this point, so there’s no reason for the rest of the world to keep US dollars as a reserve currency, so the non-producing aristocracy who are *currently* rich need to triple or quadruple their dollar holdings in order to *remain* rich when the international value of the dollar is set for a decade of decline.

George W. Bush is one of the most successful Presidents in US history; he has done more of what he and his constituency (Texas oil moguls) wanted to have done than anyone else has ever dreamed would be possible. You’ll notice that currently they are busily gutting endangered species protections. Even that traitor Reagan was less successful, although obviously he set the ball up for W. and his cronies.

Poor President Hoover, um, I mean Obama – he’s been set up by Coolidge, um, I mean Cheney, to take a mighty big fall.
Takuan

on a lighter note; Gulf War Syndrome is “real” now.
Kaiser Leib

“…caused by inadequate banking regulation…”

I’d assert that it has more to do with the Community Reinvestment Act and the existence of such enterprises as Fannie Mae and Freddie Mac than with deregulation. It was indeed foolish for those who purchased toxic mortgages as though they were money in the bank to do so, but it was foolish as well for those mortgages to have been granted in the first place. By putting people who cannot afford houses into houses, the government (you can argue that FNMA and FDMC are private, if you wish; I will disagree) began to lay the foundation for this house of cards long ago.
Teresa Nielsen Hayden / Moderator

If the Bush Republicans truly believed in laissez-faire capitalism, they wouldn’t bail out big corporations when they screw up, or give them tax breaks, and they wouldn’t profess to be taken by surprise when deregulation results in disaster. For that bunch, the universally beneficial effects of laissez-faire capitalism and deregulation are fairy tales they tell the voters. Real power-and-money guys know better.
Kaiser Leib

@Decius #13 – What about Fannie and Freddie?
minTphresh

this was caused by putting the wolves in charge of the henhouse. why is everyone so surprised when the coop is opened and all the chickens are gone. paulson was the ex-ceo of goldman-sachs. right before this mess hit the news, he and bush secretly wrote( and bush signed) a tax proposal giving banks gigantic tax breaks for “bailing out” banks in “trouble”. so not a penny goes to helping those who need it, instead the money goes to buying more and more banks. a lose/win situation. guess who the winner is? hint: it ain’t us.
Mark Jaquith

“the financial collapse caused by inadequate banking regulation”

How about the government that incentivized risky mortgages? How about the government that gave Fannie/Freddie a bailout guarantee? How about decade after decade of deficit spending, expensive wars, and expensive entitlement programs causing massive devaluation of the dollar? The problem wasn’t inadequate regulation of banks. The problem was that the government was simultaneously trashing our currency and encouraging risky investments. It’s the government that needs more regulation.
decius

@SKR

The public cannot simultaneously let Washington off less easily and in a less partisan way. The public has a big red/blue switch and they flip it when they aren’t satisfied with the status quo. Our present arrangement doesn’t afford them greater granularity, particularly in regard to Administration policies.

Nevertheless, the Republican party sells itself as the party of Wall Street, the party of deregulation, and the party of “laissez faire” capitalism. In general, the public cannot repudiate deregulation by voting for the party that represents it.

The deregulation of the banking industry that you reference was largely architected by Republican Phil Gramm. It was passed by a Republican House and a Republican Senate, with the Democratic President threatening to veto it through to the final hours of negotiation.

Furthermore, Bush Administration officials are responsible for directly opposing attempts to contain the housing bubble and stop the predatory lending.

Certainly, there were Democrats in the Clinton administration who embraced deregulation and there were Republicans, particularly at the state level, who voted for bills that attempted to stop predatory lending. But, in this case, by and large, the binary red/blue switch that the public has is punishing the right people.
urshrew

I’ve read so many rebuttals of the CRA blame game I’m going to stumble over myself when I hear someone in polite conversation mention it as proof that its all the Democrats fault.
tcip1

Terrorists only managed to take out the twin towers, it was our own government that destroyed the rest of the financial system. Excessive government meddling with the money supply over a very long period of time, and government forcing banks and other financial institutions to carry out misguided social programs did the rest.
Takuan

“misguided social programs”, yep, them fat cats are technically part of society alright. But which part?
decius

@Kaiser Leib

Blaming the housing crisis on the CRA and the GSEs is a partisan talking point that has been mostly discredited.

See this article.

The core point is that by 2005 only 20% of subprime loans were being made by institutions that were subject to the CRA.
ill lich

“Why does Wall Street hate America so much?”