Money out of nothing or money to nowhere – how hunger for money destroys human lives and economics
I heard a lot about global crisis of 2008-2009 earlier, but I did not know clearly how catastrophic it was in real scale. I even did not imagine, how absurdly financial sphere can influence on lives of ordinary people and state economy. The idea, that finances are always under precise and permanent state’s control, stucked in my head as unbreakable truth. Only after watching Charles Ferguson’s film “Inside Job” I got the overall picture of what was happening then. The chain of events that took place in 2000-2008 and led to the global crisis only strengthen the importance of providing strict and independent state control over the financial sector.
After watching “Inside Job”, I got the understanding, how thirst for profit spoil human value system, and can say that bankers, lawyers, rating agencies and high-ranking government officials, which deal with big money, are vulnerable to exceedance of own benefits over the benefits of others, whose interests they are intended to defend. They are also prone to excessive risks, the details of which are highlighted by essay revise service.
As known, in the traditional model of banking investment the partners put the money up and must organize very reliable control over that money. Such businessmen want to become wealthier, but they don’t want to bet the ranch on anything. But then President Reagan was vulnerable to lobbyism and opinions of experts. The period of deregulation in USA financial sphere started. It caused growth of risky investments with depositors’ money in many different companies. Most of them failed and gone bankrupt in short period. People’s life savings, assessed in $124 billion, were lost and thousands of CEOs went to jail.
In 2000s the whole political system became captured by biggest companies of financial sector. The Wall Street had enough money to manipulate the government. The biggest corporations consolidated into several big firms. They were so big, that their failure could destroy the whole US financial system. Despite this, Clinton’s policy helped them grow even more. “Citigroup”, what was identificated as world’s biggest financial services company soon, was founded in this way. After that Congress passed the “Gramm-Leach-Bliley Act”, which in fact was defence mechanism for Citigroup. This how was opened the way for future mergers.
The situation became much more difficult when market of derivatives had completely established. It should be noted that formation of derivative market was fast and aggressive. The CFTC (Commodity futures trading commission), what was a supervisor in this sphere, was ignored by state’s administration. Of course, this situation looked at least suspiciously, because this financial instrument made the biggest banks dependent on it’s profits. In the next few years Greenspan, Rubin and Levitt made a collective statement, recommending legalization of unregulated derivatives. Unfortunately the bill passed in 2000.
Financial sector of USA in 2000s was represented by few “big players” in each segment. It was a logical consequence of legal mergers and acquisitions and legal free exchange of derivatives. Two financial conglomerates were established very fast – JP Morgan and Citigroup. Such banks as Morgan Stanley, Merrill Linch, Lehman Brothers and Goldman Sachs, took under control the investment sphere. AIG, MBIA and AMBAC took over the securities insurance services. Such agencies as Fitch, Moody’s and Standard & Poor’s, made an expert reviews and overestimated ratings on thousands of derivatives. The “food chain” of securitization was completed – trillions of dollars were connected in one system.
Clearly, this system became a ticking time bomb. Lenders did not care any more about borrower capacity to pay. Investment banks did not care about amount of sold CDOs as higher sales granted them higher profits. Rating agencies did not care about real rating of derivatives as they were paid by banks for overstated ratings of securities and they even had no liability for that. Besides, banks preffered to increase the number of subprime loans, what also caused increase in predatory lending. Mortgage industry became a “housing bubble”.
Potential risks in banking were consciously ignored. The bank leverage ratio in the end of 2000s became really frightening – more than 30:1. Credit default swaps (CDS) appeared. They allowed securities insurance companies like AIG to play a very dangerous game. Investors of CDOs from one side were interested in pays for their losses if CDOs went bad. Speculators from another side were interested to bet against CDOs, which they even did not own. Risks were too catastrophic. And even despite that, this companies paid its employees unreal bonuses with each new contract.
Despite cautions of econimists-experts like Raghuram Rajan, “bubble” continued to grow until it blew up. I agree with experts’ opinion that consequences of such ignoring the problem were terrible for the entire financial system. And I am speaking not only about failure of loan system, CDS or unemployment. I am speaking about request, made to Congress by Paulson. $700 billion were directed to bail out the banks. And, of course, great amount of money were raised with the help of taxpayers. Many people were stolen from and even had to pay for that later – what a nonsense. The system continued to exist…
In my opinion, high-ranked authorities needed to stop the process of legitimation of uncontrolled derivatives market. Senator Phil Gramm indicated that derivatives “are unifyuing markets and reduce regulatory burden” and helped to pass the bill. Interesting fact, Gramm’s wife served as one of executives in “Enron”. Phil Gramm left the Senate and became a high ranked director in UBS. Treasure secretary Larry Summers took part at legalization of OTC derivatives and soon he got $20 million as a consaltant in derivative hedge fund. Later The Securities and Exchange Commission did nothing during the “bubble” formation. These events couldn’t be a coincidences. They prove that decisions of high-ranked government officials were just bought.
It’s hard for me to accept the fact that top managers like Charles Keating can buy the expert opinion of well known economic scientist to mislead the authorities, investors and other people that high-risky operations with other people’s money and doubtful securities are really safe and provide any development in financial market. The other disgusting fact is that Alan Greenspan, the expert and well known economist, who became a chairman of America’s central bank Federal Reserve system, continued to misinform millions of people. He was even reappointed by Clinton and Bush later. It is a perfect example of great authority’s mistake, made under the pressure of big bosses from financial sphere through lobyists. And these events were only launching pad for the approaching crisis.
I think that finansial sector requieres very strict control, especially derivative market. Regulation of this instruments must realize at the legislative level. The investment banks must inform their clients about all potential risks and minimize own risky operations. The usage of depositors’ money also must be limited to prevent too risky short-term operations. Besides, compensation schemes in biggest financial companies and agencies must be supervised very strictly. Reporting must be clear and transparent for all interested persons, all suspicious numbers must be analysed. Money, stolen by Ponzi scheme, must be returned to rightful owners and offenders must be punished. I am convinced that these steps will help to prevent financial fraud.