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Excellent MUST LISTEN interview with former CFTC regulator

by NBBooks Sun Apr 6th, 2008 at 11:40:08 AM EST

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

And Greenberger warns that we are at the beginning of the financial crises, not the end.

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. And if a Bear Stearns collapses, you're going back to 1929.

The [stock] market went up last week because there is the belief that Bear Stearns is the end. But there are some of us who are very worried that Bear Stearns is the beginning and not the end, and if we needed $30 billion to bail out Bear Stearns . . . .

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.  

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.

Also posted at Daily Kos: http://www.dailykos.com/story/2008/4/6/11165/01183/124/491105

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You really, really, really, really need to listen to this interview, and get other people to listen to it, also.

Couldn't agree more.  Back in October I posted a link to an interview Terry Gross did with Gretchen Morgernson, financial reporter for the New York Times, which helped me a lot.

But this interview with Michael Greenberger was even more helpful (maybe in part because he had the benefit of more hindsight.)

Truth unfolds in time through a communal process.

by marco on Sun Apr 6th, 2008 at 05:17:26 PM EST
This is the message I sent to a friend of Boston:

"ou have to listen to carefully this interview to Michael Greenberg to understand USA's Confusing Economy Clearly Explained in 40 minutes. All Americans should listen to him to grasp what's happening:

http://www.npr.org/templates/story/story.php?storyId=89338743

Robert Reich's yesterday column:

THURSDAY, APRIL 03, 2008
HRC's Odd Economics
Senator Hillary Clinton said today that her rival for the Democratic presidential nomination has been "timid and unenthusiastic" in his proposals for dealing with the current economic downturn. This is an odd charge, to say the least.

Her proposal is to have government purchase securities containing non-performing mortgage loans - securities whose worth is unknown because the bad loans were repackaged by mortgage lenders with good loans and then resold - and then restructure them (with lower interest rates at longer, fixed terms) so homeowners would have a better chance paying their mortgages.

Obama supports and co-sponsored (as did HRC) a proposal developed by Senator Christopher Dodd and Rep. Barney Frank which would leave the restructuring job to investors who - backed by enough of a government guarantee to make the task feasible - would buy the securities. Given that the Dodd proposal is on life support in the Senate right now, HRC's more ambitious plan has no prayer of becoming law. But even if it did, it makes no sense. How could anyone be sure the government bought the securities at a price that reflected their true "worth" when there's no market to determine their worth to begin with? The whole idea behind the Dodd-Frank proposal is to create such a market.

HRC's other idea is to create a commission on foreclosures, headed by Alan Greenspan, Bob Rubin, and Paul Volcker. Yet Greenspan is more responsible for the housing mess than any other single person in Washington or on Wall Street. It was, after all, Greenspan whose Fed lowered short-term interest rates be lowered to 1 percent in 2003 - making money so cheap that every financial institution eagerly lent it to any halfway sentient human being. And it was Greenspan who argued that neither the Fed, the Commodity Futures Trading Commission, nor any other pertinent oversight agency should bother to watch whether financial institutions were behaving themselves. Bob Rubin, for his part, joined Greenspan in successfully urging Congress in the late nineties to repeal the Glass-Steagall Act, the last remaining edifice separating commercial from investment banking - enabling Citigroup, which Rubin thereafter joined, to acquire Traveler's Insurance. A commission headed by two of the people most responsible for deregulating Wall Street in recent years is unlikely to devise ways to prevent another Wall Street crisis. (Volcker, who headed the Federal Reserve before Greenspan, is an Obama supporter.)

Obama, by contrast, has called for legislation requiring that investment banks, hedge funds, and other non-bank financial institutions possess capital and liquidity proportional to the risks they're taking on - something that neither Treasury Secretary Hank Paulson nor, for that matter, HRC, has advocated. Yet this is the only sensible way to avoid future messes like this, especially if the Fed is going to be the lender of last resort to these as yet unregulated Wall Street institutions.

Obama's response to the current crisis is exactly right. HRC's make no sense at all."

And then;

Seems like even the American Enterprise Institute is singing a different tune nowdays...

http://www.aei.org/publications/filter.all,pubID.27713/pub_detail.asp

"We are probably at a point, however, where we need to choose between two approaches to putting a floor on house prices. Either have the Fed print so much money that a return to inflation eventually stabilizes house prices and then pushes them back up--the radical monetize approach--or, alternatively, employ the nationalize approach, whereby a federally funded agency steps in to buy mortgages at less than their current face value to help stabilize the credit markets. The Fed's commitment to ensure price stability makes the nationalize approach the only realistic option, however unattractive it may be."

..................

Were all laissez-faire on the way up and all Keynesians on the way down.

Kisses

by kukute on Sun Apr 6th, 2008 at 09:34:44 PM EST
In another recent interview on On Point, Clinton former Treasury Secretary Lawrence Summers says that it was the right move to bail out Bear Stearns.  Skeptical host Tom Ashbrook presses him on why he thinks so, but Summers does not want to spell it out.

In this Fresh Air interview Michael Greenberger agrees with Summers that Bear Stearns could not be allowed to fail.  But unlike Summers, he quite clearly states the unsettling reason.

Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire

by marco on Mon Apr 7th, 2008 at 12:24:56 AM EST
One question in the interview was, where is all that money gone, if everyone is loosing? Money indeed does not disappear anywhere, and some lucky bettors got immensely rich. (Yes, most of them are lucky - timing the bust is still small science. At best, a small rush of common sense got rewarded immensely.) That is what the market game came to: a few winners who could own the world. And I would not be surprised if some of those winners have an agenda...
by das monde on Tue Apr 8th, 2008 at 03:28:34 AM EST
There is no "law of conservation of money" and total asset values are definitely not conserved. See my recent diary on liquidity risk, How much is $172 trillion worth?
So, no, 90 million shares are definitely not worth 90 million times the share price, unless you can enter into a deal over the counter (off the exchange) with someone else who would like to own 1% of M$. And, most definitely, the entirety of the shares of Micro$oft are not immediately worth $271bn even though 1000-share lots (see the "bid" and "ask" in the Yahoo! Finance screen capture) can be quickly bought and sold at the share price.


When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Tue Apr 8th, 2008 at 05:19:09 AM EST
[ Parent ]
Strickly speaking, money is not conserved, I agree. But the change is in interest rates, mostly. Those who seld stock or real estate at the most opportune time did get the big money, without much risk and charges. Tell them about a crisis.
by das monde on Tue Apr 8th, 2008 at 10:05:29 PM EST
[ Parent ]
The following paragraph is duplicated before and after the fold. Is that intentional?
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:


When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Tue Apr 8th, 2008 at 05:22:01 AM EST
Thank you for the posting. It is a valuable macro view of the economic dilemma. If you would like a micro view of a significant part of the dilemma; please go to the following link. It is CBS Marketwatch columnist Herb Greenberg's interview with a California mortgage broker who who says sub prime is just part of the mortgage real estate fiasco. The column is from Dec. 2007.

Link: http://blogs.marketwatch.com/greenberg/2007/12/straight-talk-on-the-mortgage-mess-from-an-insider/

Also here is the link to Wikipedia of Wendy Gramm, former Sen. Phil Gramm's wife. What a piece of work she is. They make a wonderful team for deregulation.

You would think McCain, even if for only perception, would stay as far away as possible to Gramm and his kind. It tells me McCain and others like him live in another world and have allowed themselves to be brainwashed of a philosiophy which takes precedent in their minds over any realistic facts which may be contrary to what they believe. Gee, sound like George Bush, all over again.

by An American in London on Tue Apr 8th, 2008 at 01:29:15 PM EST
P.S. Here is the link to Wikipedia of Wendy Gramm, Sen. Phil Gramm's wife.

http://en.wikipedia.org/wiki/Wendy_Lee_Gramm

by An American in London on Tue Apr 8th, 2008 at 01:45:02 PM EST
[ Parent ]
Does anyone have a link to who actually voted for Phil Gramm's bill which deregulated the commodities and derivatives? According to the former regulator interviwed; it was passed during Xmas 2000 as an addendum bill to a vast omnibus spending bill. I would like to know who voted for it in the Senate and the House.
by An American in London on Wed Apr 9th, 2008 at 09:36:42 AM EST
Have you looked here?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Wed Apr 9th, 2008 at 09:45:02 AM EST
[ Parent ]
Thanks for the site. Now all I need is the roll call number and congressional session.
by An American in London on Wed Apr 9th, 2008 at 01:10:34 PM EST
[ Parent ]
Xmas 2000 would have been the 2nd session of the 106th congress, right?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Wed Apr 9th, 2008 at 02:21:55 PM EST
[ Parent ]
Yes it would have been the second session but I dont have the formal title of the bill as I tried to use a search and it failed plus according to the NPR interview, the bill was an addon to an omnibus appropriations bill whose title I also dont have. If we could find out who voted for Gramm's bill; it could be important as they should be targeted in their next election if they are still running.

The bill is a significant factor in causing our tragic economic crisis and the people who voted for it should be held accountable; especially if they were in the 'backpockets' of the financial sector who wrote the bill for Sen Gramm to sponsor through the Senate. There must also be an equivalent bill for the House of Representatives.

Your help is greatly appreciated.

by An American in London on Thu Apr 10th, 2008 at 10:09:24 AM EST
[ Parent ]
Well, the last Senate vote of that session appears to have taken place on December 7. The list is reverse-chronological and the last vote is on
H. J. Res. 127; A joint resolution making further continuing appropriations for the fiscal year 2001, and for other purposes.
That doesn't appear to be the bill you're looking for.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Thu Apr 10th, 2008 at 10:30:14 AM EST
[ Parent ]
Thank you for your help. If you find the bill(s) and a rollcall of the Senators and House of Representatives; lease post.
by An American in London on Fri Apr 11th, 2008 at 02:55:34 AM EST
[ Parent ]


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