On the Various Causes of the Financial Crisis of 2008: Have We Learned Anything?

In January, 2011, the Financial Crisis Commission announced its findings. The usual suspects were not much of a surprise; what is particularly notable is how little had changed on Wall Street since the crisis in September of 2008. According to The New York Times, "The report examined the risky mortgage loans that helped build the housing bubble; the packaging of those loans into exotic securities that were sold to investors; and the heedless placement of giant bets on those investments." In spite of the Dodd-Frank Financial Reform Act of 2010 and the panel's report, The New York Times reported that "little on Wall Street has changed." One commissioner, Byron S. Georgiou, a Nevada lawyer, said the financial system was “not really very different” in 2010 from before the crisis. “In fact," he went on, "the concentration of financial assets in the largest commercial and investment banks is really significantly higher today than it was in the run-up to the crisis, as a result of the evisceration of some of the institutions, and the consolidation and merger of others into larger institutions.” Richard Baker, the president of the Managed Funds Association, told The Financial Times, "The most recent financial crisis was caused by institutions that didn't know how to adequately manage risk and were over-leveraged. And I worry that if there is another crisis, it will be because the same institutions have failed to learn from the mistakes of the past." From the testimonies of managers of some of those institutions, one might surmise that the lack of learning in the two years after the crisis was due to a refusal to admit to even a partial role in crisis.  In other words, there appears to have been a crisis of mentality, which, as it contains intractable assumptions and ideological beliefs, as well as stubborn defensiveness, is not easy to dislodge such that legislation past Dodd-Frank could ever be passed.

Lehman was a particularly inept player leading up to the crisis.     Zambio

The full essay is at "Causes of the Financial Crisis."

Ivy-League Exclusivity: Political Ethics in The Yale Political Union

When I was a student at Yale, I was a member of the Party of the Right (POR) in the Yale Political Union (YPU). I was pretty much a libertarian back then, and the POR consisted of libertarians and Burkean traditionalists. The Burkeans dominated the positions, and they had their little club within the club to protect their prerogative. John Kerry, who would go on to be a U.S. senator and a presidential candidate, had been president of the YPU in 1968.  At least as of my student years at Yale, the YPU has consisted of several “parties,” which are really little debating/drinking societies spanning the ideological spectrum.  This is merely the surface, however. Beneath, Yale's culture of exclusivity reigned. Getting into Yale is just the first of several levels of greater and greater exclusivity. 

The full essay is at "Exclusivity in the Yale Political Union."

Western Banks Lending to Asia's Expanding Middle Class: Profit vs. Planet

In April 2013, debt levels in Asia were reaching record levels as international lenders were extending short-term loans to a growing middle class. Non-mortgage consumer credit in Asia outside of Japan had increased 67% from 2007 to reach $1.66 trillion by the end of 2012. This credit included credit cards and loans for cars, electronic products, and appliances. Outside of Japan, Asian car and motorcycle loans nearly doubled from 2007 to 2012, to reach a record $219.7 billion. Appliance and electronics loans also more than doubled, reaching a high of $10.9 billion. Meanwhile, credit-card loans grew by 90% to reach a record $234.1 billion, according to Euromonitor. The incentive for the banks is not difficult to fathom. At the time, more than half of the world’s middle class was expected to be in Asia by the end of the decade. That translates yearly into more than 100 million additional people per year. For the banks, this was an opportunity since at least the beginning of the decade because growth was not possible in the European Union and the United States on account of the financial crisis of 2008 and the ensuing European debt-crisis that extended well into 2013. The European Commission of the E.U. was also working on regulatory proposals that would limit the incentives of mortgage servicers to produce too many “bubble-creating” mortgages. 

So Western banks had an incentive to look east for fruitful markets. Interesting, government regulators in China, Malaysia, and Indonesia had began reining in mortgage, credit-card and auto/motorcycle lending, perhaps in fear of an Asian financial crisis. Had Western bankers learned their lesson, or were they unwittingly bringing their reckless mentality to Asia? Two levels of concerns can be extracted from this case. I contend that the more immediate concerns were crowding out attention that ought to have been paid to the larger, but longer-term, problems.

The full essay is at "Lending to China's Middle Class."

More people=More cars=More pollution    source: Businessweek

Decreasing Bank Size by Increasing Capital-Reserve Requirements: Plutocracy in Action?

Although the Dodd-Frank Financial Reform Act was passed in 2010 with some reforms, such as liquidity standards, stress tests, a consumer-protection bureau, and resolution plans, the emphasis on additional capital requirements (i.e., the SIFI surcharges) could be considered as weak because they may not be sufficient should another financial crisis trigger a shutdown in the commercial paperr market (i.e., banks lending to each other). A study by the Federal Reserve Bank of Boston found that even the additional capital requirements in Dodd-Frank would not have been enough for eight of the 26 banks with the largest capital loss during the financial crisis of 2008. As overvalued assets, such as subprime mortgage-backed derivatives, plummet in value, banks can burn through their capital reserves very quickly. A frenzy of short-sellers can quicken the downward cycle even more. This raises the question of whether additional capital resources would quickly be "burnt through" rather than being able to stand for long as a bulwark. The financial crisis showed the cascading effect that can quickly run through a banking sector as fear even between banks widens as one damaged bank impacts another, and another. 

The full essay is at "Manipulating Bank Size by Reserves."

Johnson’s “Reinvention” of JC Penney: Too Much and Too Little

In April 2013, JC Penney’s board wished the CEO, Ron Johnson, “the best in his future endeavors.” His effort to “reinvent” the company had been “very close to a disaster,” according to the largest shareholder, William Ackman. During Johnson’s time at the company as its CEO, shares fell more than fifty percent. In February 2013, Johnson admitted to having made “big mistakes” in the turnaround. For one thing, he did not test-market the changes in product-line and pricing-points. The latter in particular drove away enough customers for the company’s sales to decline by 25 percent. Why did Johnson fail so miserably?

The full essay is at "JC Penny Reinvented?"

Ron Johnson's short tenure as CEO of JC Penney was disastrous, according to Altman.   Source: Reuters

Is Modest Growth vs. Full Employment a False Dichotomy?

As Summer slid into Autumn in 2012, the Chinese government was giving no hint of any ensuing economic stimulus program. This was more than slightly unnerving for some, as a recent manufacturing survey had slumped more than expected, to 49.2 in August. A score of 50 separated expansion from contraction. A similar survey, by HSBC, came in at 47.6, down from 49.3 the previous month. Bloomberg suggested that China might face a recession in the third quarter. So why no stimulus announcement?  Was the Chinese government really just one giant tease? I submit that the false dichotomy of moderate economic growth and full employment was in play. In short, the Chinese government did not want to over-heat even a stagnant economy even though the assumption was that full employment would thus not be realizable.

The full essay is at "Economic Growth and Full Employment in China." 

Greek Austerity: Pressure on the Environment

“While patrolling on a recent cold night, environmentalist Grigoris Gourdomichalis caught a young man illegally chopping down a tree on public land in the mountains above Athens. When confronted, the man broke down in tears, saying he was unemployed and needed the wood to warm the home he shares with his wife and four small children, because he could no longer afford heating oil. ‘It was a tough choice, but I decided just to let him go’ with the wood, said Mr. Gourdomichalis, head of the locally financed Environmental Association of Municipalities of Athens, which works to protect forests around Egaleo, a western suburb of the capital.”[1] Tens of thousands of trees had disappeared from parks and forests in Greece during the first half of the winter of 2013 alone as unemployed Greeks had to contend with the loss of the home heating-oil subsidy as part of the austerity program demanded by the state’s creditors. As impoverished residents too broke to pay for electricity or fuel turned to fireplaces and wood stoves for heat, smog was just one of the manifestations—the potential loss of forests being another. On Christmas Day, for example, pollution over Maroussi was more than two times the E.U.’s standard. Furthermore, many schools, especially in the north part of Greece, had to face hard choices for lack of money to heat classrooms.

Greek forests were succumbing  in 2012 to the Greeks' need to heat their homes as austerity hit.   source: Getty Images

Essentially, austerity was bringing many people back to pre-modern living, perhaps including a resurgence in vegetable gardens during the preceding summer. At least in respect to the wood, the problem was that the population was too big—and too concentrated in Athens—for the primitive ways to return, given the environment's capacity. 

The full essay is at "Greek Austerity and the Environment."

1. Nektaria Stamouli and Stelios Bouras, “Greeks Raid Forests in Search of Wood to Heat Homes,” The New York Times, January 11, 2013.
2. Skip Worden, God's Gold, available at Amazon.