Mike Conlon
Senior Instructor
instructor@mywealth.com
Happy Anniversary! One year ago today the collapse of Lehman Brothers kicked off the economic death spiral that nearly took down the world’s economy, and caused the US government to take unprecedented action to prevent The Great Depression 2.0. Since that time we’ve been through a lot and now that the banks have been stabilized, what should we expect going forward?
Well that all depends on whether or not you believe we have learned anything from this once-in-a-lifetime fiasco. While it’s comical to watch the CNBC zoo crew play Monday morning quarterback and speculate over what might have been, I think it’s more productive to identify some of the “sins of the past” that brought us to the edge of the cliff and what has been done to ensure that this never happens again.
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No discussion of the financial crisis can be taken seriously without a discussion of Credit Default Swaps (CDS). Also referred to as “financial weapons of mass destruction”, the unregulated nature of this market was a major factor in contributing to the financial meltdown. Increased financial regulation was a top priority of the current administration, yet here we are, one year later, with no new regulatory reforms.
Another contributing factor was excessive leverage in the system. Banks were over-leveraging their balance sheets and giving out money to anyone who would take it. They also used that leverage to trade for their own accounts and much of that money went into toxic assets. So far the solution has been to halt lending, reduce leverage, and have the government buy their toxic assets. Not bad work if you can get it! This looks more like encouraging this behavior, rather than discouraging it.
Excessive executive compensation was a both a cause and a symptom of the financial crisis. It looks like we’ve done such a good job in this area that the G-20 now needs to get involved in the act. Don’t they realize that if Goldman Sachs doesn’t report record earnings and thus rightly reward their talent with record bonuses; that the whole entire world will come to an end? So what if it’s tax-payer money, we all need to do our part to ensure that the economy will recover!
The last point I want to touch on is extremely low interest rates. If rates weren’t so low then banks would not have HAD to speculate so much to meet earnings estimates. Consumers may have been slightly perturbed at their inability to exercise their God-given right to own a home, luxury vehicle, or plasma TV. In what would have been a widely unpopular move, potential consumers may have actually had to be able to afford the stuff they purchased.
So, what have we learned from this mess? After all, those who don’t learn from the past are doomed to repeat it.
First, that financial reform is just a myth and nothing more than a populist rallying cry to help politicians get elected. Once in office, they can continue to profit from the banking lobbyists who reward them for their inaction.
Next, that it pays to be a big bank as you get to keep all of your profits and distribute it in the form of bonuses to your employees and then have the government and taxpayers pick up the tab for your losses.
Lastly, that having excessively low interest rates never leads to inflation or speculative bubbles and that the government always follows the best course of action.
As you can see, by learning from the lessons of the past we can be sure to avoid another financial crisis in the future. Just trust in those in Washington D.C and Wall St. to keep your best interests in mind and everything will be fine. Seriously. Not kidding. No sarcasm here.
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