teomaxxx

another excellent post from him:
Congress: Anna Schwartz Says You're Wrong
Nearly a year ago, on October 30th, 2007, I first began petitioning Congress with the following message (among others):

"Congress MUST NOT bail out – under any circumstances – mortgage companies and investors who voluntarily entered into risky mortgage and derivative contracts during these last several years due to lax lending standards, poor due diligence or as a matter of business policy. Failure must be allowed irrespective of the damage done to these firms, because only financial failure serves as an effective check and balance against excessively risky behavior and greed. The practice of intentionally making problems “really big” in the smug knowledge that you can take ill-gotten profits and lay off the risk on society has led to a series of economic disasters that have been “charged off” on the American Taxpayer, going back to the S&L Crisis.

Congress must act to ban all off-balance-sheet “conduits”, SIVs and similar schemes, and require that any and all liabilities be properly and completely reported both to regulators and shareholders. These vehicles create an intentionally-false view of firms’ financial condition. In effect, these vehicles serve to fraudulently manipulate a bank’s balance sheet by hiding debt. These are the same accounting tricks that were instrumental in Enron’s bankruptcy. Now, on the front page of the Wall Street Journal (October 13th) we learn that Secretary Paulson is actively involved in attempting to expand this deception! "

Since then we have seen multiple petitions, all of which are chronicled at SupportedTheBailout.Org, and all of which have been largely ignored.

It is willful ignorance of these petitions that leads us to being where we are in this economic crisis.

It is willful ignorance of the facts that has caused your 401k and IRA balances to decline by nearly forty percent, lending to constrict the point that we are threatened with another Depression, and unemployment to skyrocket.

Ben Bernanke claims to be a student of The Depression and has written a thesis paper on it - one that I have read, and, in my opinion, have found to be indefensible. Of course when your defense is heard by a bunch of monetarists who believe that "the answer to all crunches in liquidity is more liquidity", you pass. Such is the ivory tower world, which unfortunately is rather disconnected from the world that those who must "do" in order to survive (instead of "teach") live in.

But Anna Schwartz is no ordinary economist. Nor is she an ordinary student of The Depression.

She, at 92, is one of the few people who actually lived through it and remembers what it was like, never mind quite possibly knowing more about monetary history, theory and the actual practice of banking than anyone alive.

She is co-author (along with Milton Friedman) of the 888-page tome "Monetary History", a book that Ben Bernanke himself has said is "the leading and most persuasive explanation of the worst economic disaster in American History."

And today, in The Wall Street Journal, she calls a spade..... a spade.

Let's use her words, of course, attributed:

"We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads -- the difference between what it costs the government to borrow and what private-sector borrowers must pay -- are at historic highs.

This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. "The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."

So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."

Of course it does. That bypass is intentional Ms. Schwartz. It is an outrageous and in fact insane attempt to protect those who have made bad bets from the proper outcome of those wagers.

That protection stems from the fact that both of the main protagonists in "addressing the issue", Chairman Bernanke and Secretary Paulson, in fact were prime architects in causing the problem in the first place.

Chairman Bernanke was on The Federal Reserve Board during the Greenspan years, when Alan Greenspan "pumped liquidity" after 9/11 and the Tech Wreck, yet at the same time removed essentially all regulation and oversight from the banking sector. He is thus complicit in the generation of the credit bubble that led to this disaster, and to take strong action against the perpetrators of same he would both have to admit that he in fact was one of the prime causative factors in the mess and would be forced to resign in disgrace.

Secretary Paulson is in an even worse situation - he, as Chairman of Goldman Sachs, testified in Congress as far back as the year 2000 that Investment Banks should have the shackles of leverage restraint removed from them. He failed to get that from Arthur Levitt in 2000 (President Clinton's chair of the SEC) but came back to the well in 2004 under President Bush and was successful. Two years later, having used that expansion of leverage to garner a personal fortune of $500 million dollars, he cashed out tax-free to take his seat as Treasury Secretary.

Every one of the large firms that has failed - all five (Fannie, Freddie, AIG, Lehman and Bear Stearns) - would still be in operation today if their leverage had been held at the pre-2004 12:1 limit. Therefore, Secretary Paulson must accept personal responsibility for the decisions that led to the failure of these firms, as he was one of the primary individuals in American Business who argued for removal of these constraints.

As for Anna's view on what should be done now, I again quote the esteemed (and unimpeachable) expert:

"Rather, "firms that made wrong decisions should fail," she says bluntly. "You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich." The trouble is, "that's not the way the world has been going in recent years."

Instead, we've been hearing for most of the past year about "systemic risk" -- the notion that allowing one firm to fail will cause a cascade that will take down otherwise healthy companies in its wake.

Ms. Schwartz doesn't buy it. "It's very easy when you're a market participant," she notes with a smile, "to claim that you shouldn't shut down a firm that's in really bad straits because everybody else who has lent to it will be injured. Well, if they lent to a firm that they knew was pretty rocky, that's their responsibility. And if they have to be denied repayment of their loans, well, they wished it on themselves. The [government] doesn't have to save them, just as it didn't save the stockholders and the employees of Bear Stearns. Why should they be worried about the creditors? Creditors are no more worthy of being rescued than ordinary people, who are really innocent of what's been going on."

Exactly. Thank you Ms. Schwartz for adding the imprimatur of an unimpeachable expert, perhaps the most credible expert on monetary and banking policy alive, to the view that I and a few others have been shouting to Congress and others over the last year.