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Michael Greenberger, former Director of Trading and Markets at the Commodity Futures Trading Commission (CFTC), was interviewed by NPR’s Terry Gross this past Thursday, April 3.

When people tell you this is the worst economic crisis since World War Two, that’s a way of not saying the panicky thing, which is, we may be heading for a depression.  

You really, really, really, really need to listen to this interview, and get other people to listen to it, also. It is almost 40 minutes long, but worth every info-packed, thought-provoking second.

Greenberger explained that the sub-prime mortgage crisis was caused by financial derivatives, and that there are more crises coming, because there are many more financial derivatives out there. He notes that the one act of deregulation most to blame – even more to blame than the 1999 repeal of the Glass-Steagal Act (the law passed in the First Great Depression to separate commercial banking from investment banking)- is the Commodities Futures Modernization Act of 2000, introduced on the sly by then Senator Phil Gramm (R-TX), who is now the top economic advisor to John McCain:

it was a 262 page bill, and it was added as a rider to an 11,000 page omnibus appropriation bill as Congress was recessing for Christmas in 2000. I would say there was no one except the drafters of the bill who understood what the legislation did, and I can assure you that the drafters of the bill were not members of Congress. They were the lawyers for the investment bankers on Wall Street.

Greenberger notes that there is now more money invested in these unregulated financial derivatives than in stocks and bonds. (In my opinion, this is the root of everything that ails the U.S. economy, from the growing gap between rich and poor, to the bane of "free trade", to the lack of investment in public infrastructure and a new, green economy.) He explains that the financial system today is focused not on actual investment in the economy, but on booking bets, just like a Las vegas bookie. He and interviewer Terry Gross use a sports team analogy: with stocks and bonds, you are actually putting money into the team. But with derivatives, instead of investing in the team, you're just betting on whether the team is going to win or lose.

Moreover, Phil Gramm’s Commodities Futures Modernization Act of 2000 prohibited the federal and state governments from regulating financial derivatives, so nobody really knows how big the problem is. That’s why

We don’t know if Bear Stearns is the mine disaster, or the canary in the mine warning us of a much bigger disaster.

Greenberger warns that the securitization Wall Street applied to sub-prime mortgages to allow these bets to be placed was also applied to all other types of debt. "We are soon going to find out that it’s not just mortgages, but it’s all kind of loans: credit card loans, auto loans, student loans, are all going" to become problems in the very near future.

Greenberger has a beautiful implicit condemnation of the role Bush has failed to play:

It all goes back to these credit default swaps. The American people don’t understand that. If Franklin Delano Roosevelt were President right now, we would understand that: there would be a fireside chat; we would make it so that the American public understand it. And it’s important that the American public understand it, because even as we speak, the Wall Street interests, who have all the money in the world to hire lobbyists, the lobbyists are lobbying 24 hours a day, seven days a week, 365 days a year ... to keep this market, a shadow market, that nobody understands.

Greenberger notes that Treasury Secretary Paulson's plan, unveiled last week, is actually the result of a review of U.S. financial regulation that began in months before the financial crises erupted, in response to Wall Street crying that it was being too heavily regulated and as a result was losing business to London. Greenberger then judos the whole competition argument by noting that the less regulated British financial system is in even worse trouble than the U.S. system, with the British government having been forced to buy Northern Rock, which suffered a classic Depression-era bank run. The Paulson proposals are modeled on the British, lighter, regulation. The ironic development we see with the present financial crises, is that the less regulation you have, the more state ownership you end up with.

So, Greenberger says,

I don’t think there is any effective proposal on the table. First of all, Phil Gramm’s surprise legislation that prevented regulation of derivatives is far more important than the repeal of Glass-Steagal. . . . [We] need to eliminate the ability of banks and all other lenders not to worry that the loan they are making will be paid back or not. Derivatives have removed financial discipline from the market.

(This is the same point made by Ian Walsh on The Agonist a few weeks ago, Why Financial Crises Will Keep Happening.)

Greenberger explains why the Paulson plan is actually less regulation, not more: because it gives all the responsibility for oversight to the Fed, but does not give the Fed the power to prevent problems from developing. It only gives the Fed power to deal with problems as they occur. And it takes regulatory powers away from the states, which is why the state attorneys general and state insurance commissioners were very upset and came out in opposition very quickly.

At the end of the interview, Greenberger asks what I think is the fundamental question about the whole financial system. It is the question that defines the fault line along which the progressive movement is likely to fracture in the next few years.

Should we have an economy that’s based on whether people make good or bad bets? Or should we have an economy where people build companies, create manufacturing, do inventions, advance the American society, make it more productive? This economy is based on people sitting at their computers and making bets all day long. They call it credit default swaps, OTC derivatives, asset backed securities, etc. etc, - makes it all very complicated, but we are rewarding people for sitting at their computers and punching in bets. That’s not the way our economy is going to be built, and India and China, with their focus on science and industry and building real businesses, are going to eat our lunch, unless the American public wakes up and puts an end to an economy that praises and makes heroes out of speculators.  

Again, here is the link to the interview with former CFTC Director of Trading and Markets, Michael Greenberger.  

Originally posted to NBBooks on Sun Apr 06, 2008 at 08:34 AM PDT.

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Comment Preferences

  •  tip jar (48+ / 0-)

    Michael Greenberger is now a professor at the University of Maryland School of Law and the director of the University's Center for Health and Homeland Security.

    A conservative is a scab for the oligarchy.

    by NBBooks on Sun Apr 06, 2008 at 08:35:27 AM PDT

    •  That's The Ticket (6+ / 0-)

      Should we have an economy that’s based on whether people make good or bad bets? Or should we have an economy where people build companies, create manufacturing, do inventions, advance the American society, make it more productive? This economy is based on people sitting at their computers and making bets all day long.

      Those people "making bets" are not really creating wealth - they're just redistributing it.  And I speak as one who owns a company based on program trading of currencies.

      It's sickening to see how hollow the U.S. economy has become - particularly under Bush.

    •  Take a look at these numbers,... (2+ / 0-)
      Recommended by:
      docangel, NBBooks

      U.S. annual gross domestic product is about $15 trillion

      U.S. money supply is also about $15 trillion

      Current proposed U.S. federal budget is $3 trillion

      U.S. government's maximum legal debt is $9 trillion

      U.S. mutual fund companies manage about $12 trillion

      World's GDPs for all nations is approximately $50 trillion

      Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion

      Total value of the world's real estate is estimated at about $75 trillion

      Total value of world's stock and bond markets is more than $100 trillion

      BIS valuation of world's derivatives back in 2002 was about $100 trillion

      BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion

      NOT a typo,.... $516 trillion dollars...

      link........

      http://www.marketwatch.com/...

      You wrote,...

      "Phil Gramm’s Commodities Futures Modernization Act of 2000 prohibited the federal and state governments from regulating financial derivatives, so nobody really knows how big the problem is."

      I just read yesterday, can't find the URL, the new number is $572 trillion dollars.

      This greed ISN"T STOPPING!!!!!!!!

  •  Yes, heard this. (16+ / 0-)

    I was particularly struck by how Terry Gross kept on referring to the issues as complicated, and how he insisted, no, they're quite simple and part of the problem is that these folks keep telling you-- and congress -- it's too complicated to understand.

  •  Missed this interview (6+ / 0-)

    thanks for the tip.  Though your diary was so informative, I almost feel like I don't have to listen to it now!

    Obama made a recent speech on "smarter, more modern regulation."  Does anyone have any tips on what his specifics are?  Is he looking at regulating derivatives?

    "Fascism should rather be called corporatism, as it is the merging of government and corporate power." --Benito Mussolini

    by revelwoodie on Sun Apr 06, 2008 at 08:44:47 AM PDT

    •  I listened to Obama's specch at the Cooper Union (10+ / 0-)

      very intently, his specific proposals had to do with keeping people in their homes, such as the legislation proposed by Senator Chris Dodd. Obama really did not deal with financial derivatives at all - which I think is going to be a HUGE problem for him. My great fear is that Obama (and Clinton) are taking money and ideas from the very Wall Street interests that actually need to frozen completely out of the policy process at this point.

      Also, there is much, much more to the interview with Greenberger. Mine is a rather short summary. I strongly urge you to make the time to listen to it. This is the issue that is going to make or break the next President - and which will have the most impact on all of our lives in the coming years.

      A conservative is a scab for the oligarchy.

      by NBBooks on Sun Apr 06, 2008 at 08:52:05 AM PDT

      [ Parent ]

  •  wall street (11+ / 0-)

    stopped being an engine and became a casino
    in the 1980's

    George Bush is Living proof of the axiom "Never send a boy to do a man's job" E -2.25 S -4.10

    by nathguy on Sun Apr 06, 2008 at 08:47:16 AM PDT

  •  asdf (5+ / 0-)

    I've always felt that wall street was made up of giant pyramid schemes and he pretty much says the same thing.  A gamble.

    * 4013 * http://icasualties.org/oif/

    by BDA in VA on Sun Apr 06, 2008 at 09:03:59 AM PDT

  •  Bird and Fortune Subprime (4+ / 0-)

    There is a comedy duo out of Great Britain called Bird and Fortune.  Late last year they did one of the best satires on the current credit crisis I have seen.  It was probably the most accurate reporting on the subject up to that time.  The best thing about skit is that it made a dense subject light and funny yet very sad and true at the same time.  This may have been posted on here already but I thought it is appropriate given the subject of the post.

    Bird and Fortune Subprime

  •  Bashing Bill Clinton? (3+ / 0-)

    To start, let me add that I have never been a Bill Clinton supporter - although I certainly prefer him to GWB.

    I ask whether this is Bill Clinton bashing as I notice that both the Commodities Futures Modernization Act and the repeal of the Glass Steagal Act presented here were both signed by Clinton.  OK, so maybe he is responsible in large measure for the economic meltdown of today, but are there not policies/legislation initiated by GWB that were perhaps more devastating?  Just sayin'/askin'.

  •  Excellent diary. NBBooks (5+ / 0-)

    Good information that I am trying to understand.

    Would you be willing to cross-post your diary or diaries at EENRblog?  We have been open for just over five weeks and are really wanting to build a site that looks at issues from a progressive point of view.  It was started by the EENR team from Dkos that supported Edwards but we welcome all progressives.  It has occurred to me that we would really like someone who is conversant with economic issues writing regularly and looking at your diary list that seems to be a focus of yours.  I noticed in particular your diary in which you disagreed with Bondad and I really thought you made good points.  I would appreciate your considering this request.  Thank you.  

    Economic issues are very important and yet many of us progressives don't fully grasp them well enough.  

    Thanks for continuing to write about them.  

  •  Obama alludes to "Fireside chat" redux (3+ / 0-)
    Recommended by:
    docangel, Neon Vincent, don mikulecky

    Not trying to make a "Candidate comment", but what I've heard Obama say is that he will tell the American public what they need to know instead of what they want to hear. That would be FDR-like if he actually followed through on that promise. The highlighted text that quotes Greenberger on the 24/365 full frontal attack waged by the lobbyists points to the constant problem confronting anyone who wants to take action against the gamblers presently in control - such as it is- of our economic system - again, such as it is.

    McCain is often credited with being "earmark-free" in reviews of how many earmarks each politician racks up over the course of their legislative career. This "metric" completely misses the point that McCain, via his relationship with the lobbyists who actually write the legislation itself, doesn't need to add "earmarks." He has gone one better and written the code itself, via the lobbyist-written legislation.

    I would like to see the front page diarists highlight this aspect of the "McCain Method" more in the coming days. Sure, no earmarks to the bill for McCain. Just the lobbyist-written bill itself.

    The Moe Sizlak Experience, featuring Homer Simpson.

    by lepermessiah on Sun Apr 06, 2008 at 10:05:38 AM PDT

    •  This is the kind of initiative that wins... (1+ / 0-)
      Recommended by:
      don mikulecky

      voters over to Obama.  He treats us as the intelligent, kind-hearted populace that we are.  When the American people are given the truth, they respond with wisdom.  Those pols who would want to give us the "mushroom treatment" (keep us in the dark and feed us horse manure) are destined to become less and less powerful.  Power to a fully informed people!  OBAMA 08

  •  Thanks for the discussion of this interview (2+ / 0-)
    Recommended by:
    docangel, don mikulecky

    Kevin Phillips discusses this same theme (America is in trouble because its present-day economy is based on managing money, rather than producing actual goods) in several of his books, but, it seems like plain common sense to me. Anybody can stick themselves in the middle of a cash pass-around and skim off a bit for themselves. But, to be able to actually create something others want to purchase, and at a reasonable cost and profit, that's a skill worth hanging onto. Yet, the past 30 years have all been about throwing that capability away.

    Now that the shell game has stopped, people are remembering that money has to go for something, not nothing. We'll have to use this moment to re-regulate the money handlers, before they figure out how to dodge responsibility, yet again.

    Radarlady

  •  Great diary. (3+ / 0-)
    Recommended by:
    dejavu, docangel, don mikulecky

    The ironic development we see with the present financial crises, is that the less regulation you have, the more state ownership you end up with.

          With one qualification, I would suppose. The state will end up owning the debt not the saleable assests.

    CHRISTIAN, n. One who believes that the New Testament is a divinely inspired book admirably suited to the spiritual needs of his neighbor. A. Bierce

    by irate on Sun Apr 06, 2008 at 10:35:49 AM PDT

  •  Fascinating... (0+ / 0-)

    ...and very informative.

    Thank you for posting.

  •  Repealing the New Deal (2+ / 0-)
    Recommended by:
    docangel, toddpw

    The Repubs have been working to repeal the New Deal since FDR pushed it through.  The financial shenanigans of Gramm et alia have pretty much done that with Wall Street and we will all have to pay for it now.  This is what the money boyz wanted and worked for very hard for decades.  Now they've got it and an administration that is happy to bail them out for their chicanery and let the suckers (us) go bankrupt.

    Debtors prison and corporate feudalism are the ultimate destination for all us useless eaters.  Pets or meat anyone?

    Solar is civil defense. Video of my small scale solar experiments at http://solarray.blogspot.com/2006/03/solar-video.html

    by gmoke on Sun Apr 06, 2008 at 11:25:17 PM PDT

  •  Listening but not sold yet. (1+ / 0-)
    Recommended by:
    toddpw

    In my view on of the bigger issues is a simpler one -- leverage.  

    Investment banks are permitted to have much more leverage than commercial banks.  Bear Sterns had something on the order of a 33:1 debt to equity ratio, several times that permitted for commercial banks.

    Leverage isn't formally regulated in other industry sectors at the federal level, but prevailing business practices are for companies that actually make or do something to have much less debt than financial companies.  A debt to equity ratio of 1:1 is common there.

    Derivatives, collateralization of small debts and similar devices can reduce risk as well as increasing it.  But the problem in my view is that overconfidence in financial models used to price derivatives and secure loans.  The margin for error wasn't big enough.

    This can be a huge problem in overleveraged investment bank derivative transactions, hedge funds and private equity funds, all of which minimally regulated and have minimal margin for error.

    One of the biggest problems in the mortgage market was that the conventional wisdom on how to underwrite an adjustment rate mortgage was wrong.  Everyone was handing out mortgages based upon current interest rates rather than peak interest rates after an adjustment, and nobody with money on the table was factoring the failure to take that into account when making the loans into the amount of risk present in adjustable rate loans.

    There were also over-optimistic assumptions made about housing price growth and appraisal integrity that made low down payment loans much riskier than they appeared.

    The good news is that the market has corrected for this quite quickly.  The subprime mortgage market's volume has dropped roughly 95% in less than two years.  Almost every private mortgage insurance company (and the FHA in high risk markets) has tightened down payment and credit requirements.  A couple of hundred subprime lending companies who make up a large share of the industry have gone out of business.  The shareholders of these subprime lenders have born the biggest share of the direct losses, along with private mortgage insurers and to a lesser extent, individuals who knew they were investing in somewhat risky, high interest rate subprime mortgage collateralization pools.

    Yes, derivatives pumped lots of money into dubious loans that collapsed because too much money chasing too few good prospects eroded standards.  This is essentially the same thing that happened in the tech bust when irrational exuberance put too much money into dot.coms with questionable business plans.  It has been happening since the tulip panic and it will happen again.

    I don't think it has to sink us into a depression and tend to think that the most important thing to do is to not react with counterproductive actions simply for the sake of taking some action.  The Blueprint contains some seriously counterproductive ideas like pre-emption of state insurance regulation.

    Simply improving disclosure of leverage rates in otherwise unregulated entities might go a long ways towards reducing systemic risk in the system as a whole.

    "Those who can make you believe absurdities can make you commit atrocities" -- Voltaire

    by ohwilleke on Sun Apr 06, 2008 at 11:28:34 PM PDT

  •  The British system - from an expat (1+ / 0-)
    Recommended by:
    toddpw

    I'm sure that there are some Brits on the site that can explain this better than I but the British financial regulatory system was changed in the last years of the Blair era by current PM Gordon Brown.  The single regulator was split into 3 different bodies with 3 different roles (wish I could explain those better but I can't).  Part of the problem with Northern Rock is that 2 of the 3 parts of the regulatory system thought that the other one needed to take care of it.  There was a disinvestment of actual auditors that knew enough about financial services (Northern Rock had 3 auditors assigned to it).  Everyone knew that Northern Rocks business depended on it borrowing from other banks.  When those banks held onto their money (because they didn't know how much they would need to cover coming losses), then NR was unable to borrow money.  When word got out that the Bank of England gave them a loan, then a panic and run took place.

    But the regulatory system here is broke - don't emulate it.  Also very interesting that he says they will move to London.  They tried to change some tax laws here and the financial sector basically said that if you do that, we will move to Frankfurt or New York.  Here's the kicker - they are the SAME companies in all 3 of those cities!!

  •  I should've known (0+ / 0-)

    I should've known that SOB Phil Graham was behind this.   He's a slimy one.

  •  What a bullshit diary (0+ / 0-)

    If you don't understand something, you really should not write diaries about it.

    Derivatives are contracts that transfer risk, just like insurance policies.  The capacity of the worldwide capital markets to take risk, for a price, is dramatically in excess of that of all of the insurance companies combined.

    If a company needs to borrow money in six months, it can use derivatives to hedge against the risk that interest rates might go up in the next six months.

    If someone in Asia is concerned about currency risk in entering into a long term contract with a US company, they can enter into derivatives to hedge the risk.

    When Disney wanted earthquake protection for its theme parks, it was able to transfer earthquake risk to the capital markets through derivatives more cheaply than through insurance companies.

    Of course, the other side of the derivative is someone taking risk or "making a bet," but the availability of derivatives to protect against financial risks is a huge help in our economy.

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