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A Recent Historical Retrospect of the Problems of our Socio-economic System

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by
Dr. Ioannis N. Kallianiotis
Economics/Finance Department
The Arthur J. Kania School of Management
University of Scranton
Scranton, PA 18510-4602
U.S.A.
Tel. (570) 941-7577
Fax (570) 941-4825
E-Mail: jnk353(at)scranton.edu

 

 

<< Ειμαι ὁ πιό δυστυχισμένος ανθρωπος. Χωρίς νά τό θέλω,
κατέστρεψα τήν χώρα μου. Ενα μεγάλο βιομηχανικό εθνος
ελέγχεται από τό πιστωτικό του σύστημα. Τό πιστωτικό μας
σύστημα ειναι ελεγχόμενο από λίγους. Ετσι, η ανάπτυξι του
εθνους καὶ ολες μας οι δραστηριότητες βρίσκονται στό ελεος
μερικων ανθρώπων. Φτάσαμε νά ειμαστε μία από τίς χειρότερες,
μία από τίς πιό ελεγχόμενες  καὶ κυριαρχημένες κυβερνήσεις
στόν πολιτισμένο κόσμο.
Δέν εκλεγόμεθα πλέον μέ απόφασι καὶ ψηφο της πλειοψηφίας,
αλλά από τήν θέλησι καὶ τήν βία μίας μικρης ομάδας
κυρίαρχων α
νθρώπων.>>
Woodrow Wilson
President of the United States (1913-1921)

 

 

May 2011

A Recent Historical Retrospect of the Problems
of our Socio-economic System

 

Abstract

The purpose of this work is to give a historical retrospect of the latest “planned” problems of the U.S. and consequently of all the economies of the world, due to the inhumane globalization. The global uncertainty has increased the price of gold and the U.S. debts and deficits have caused the depreciation of the dollar, which with the help of speculators have heightened the price of oil and created a number of bubbles. The deregulation in financial markets and institutions and the easy money policy had increased lending, corruption, speculation, prices in financial and real assets (even in food) and had caused these enormous bubbles, which some people (the world planners=“the wise men”) burst them in 2008 and created the worst financial crisis, following by the first most severe recession (depression) in the 21st century. This moral and political crisis, in the western free-market (“laissez-faire”) economies, led them (especially, the Euro-zone) into the recent and continued deep recessions, enormous unemployment, annihilation of their wealth, and complete distrust for the financial markets and governments. Some nations are closed to bankruptcies and have lost their sovereignty, and a new cold war is mobilized to preserve the system.

I. Introduction 

 The latest financial crisis can be blamed on many factors and even on some particular “players” in governments, in regulatory institutions, and in financial markets per se. These ineffective (corrupted) players contributed to a common cause of illusion, to a cyclical pseudo-euphoria, and to the abandonment of our traditional value system. The global uncertainty, which has been cultivated since 1980s with absurd deregulation and excessive debts1 (Reagan, Bush I, Clinton, Bush II, and now Obama), due to the forcefully and undemocratically imposed globalization,2 is growing and the news from all sources (even though that they are controlled, “politically correct”) were revealing this planned crisis. Behind these politicians, their ignorant advisers, and their imposed policies are humans and history. Of course, a question remains in every individual; where all this money from the financial markets has gone? Who is in control of our leaders? Why the system has failed? For how long are we going to support an antihuman socio-economic system? The battle for the past is determining the battle for the present and the current battle will affect the future battle.

The major recent conflicts in our world are the followings.3 The war in Iraq, (even the former U.S. Secretary of State, Madeleine Albright, called Iraq the “Greatest Disaster” in the U.S. foreign policy), the chaos in Pakistan after Bhutto’s assassination and lately, with Osama bin Laden’s one, the Afghanistan turmoil and the shift of the war, there, from Iraq, the Turkish invasion in North Iraq (Kurdistan) and the continuous violations of the Greek borders, the Middle East expedient disorder, especially with the Israeli bombing campaign and invasion in the Gaza Strip, which lasted for three weeks and the current embargo; the Kosovo confusion and injustice with its declaration of independence and the creation of the Muslim “Great Albania” in Balkans. The usurp of the Greek name “Macedonia” and Greek history and symbols by Skopje (Vardarska), the aggression of Turkey against Greece and Cyprus (Turkish war planes are continuously flying over Greek islands violating the aerial space of the country) trying to create “grey zones”, the American interference in Europe and all over the world, the suspicious antiterrorism policies which have infringed civil liberties, the creeping war with Iran and the starting ones with the other “evil” nations, the African anarchy and civil wars, the rising of piracy from Somalia that threatens international trade, the diseases in the third world and the costly (for the poor nations) joke of the swine flu, the growing Chinese superiority and aggressiveness (China will be the future threat for the west), and the Indian outsourcing. Also, the corruption in business and politics, the fraud in financial markets (especially, hedge funds=“the big lie”), the insider trading, the inflated credit ratings and accounting data, the bribes from companies to government officials to win contracts, the outrageous, anti-social, and unjustifiable executives’ pay in our (value-free) free-market system and in some educational institutions. At the same time the low wages and without any other benefits employment for many workers, the losses of the private pension plans and the dry out social security systems, the negative effect on endowment funds, the immorality, the reanimation of the cold war, terrorism, poverty, famine, overconsumption, waste, debts, illegal migration, crime, loss of jobs, the instructed civil unrests in North Africa (especially, the war in Libya) and in Middles East (Syria, etc.), the earthquake, the following tsunami, and the nuclear disaster in Japan,4 and the international political, economic, and social fears (neo-barbarism) have negative effects on the faithless (neo-liberal) U.S., European nations, and the rest of the world.

The illusions and delusions in our “accredited” education have deteriorated the educational system and the true knowledge. The crude oil prices hit $144.15 per barrel on July 3, 2008 and now, it is at $113.68 (April 29, 2011). The stock markets fell around the world,5 the dollar declined,6 and the gold hit a record $1,562.50 per ounce (4/29/2011).7 The U.S. economy started slowing sharply since the fourth quarter of 2007 () until the second quarter of 2009 ()8and the inflation in the last two months of 2007 was exceeded 4.1%, it fell to 3.85% in 2008, and to 2.7% in 2009. Then, first, second, third, and fourth quarters of 2009, the growth was (-6.43%, -0.74%, 2.24%, and 5.55% respectively) and the unemployment rate from May to October 2009 was increasing (from 9.4% to 10.1%). Lately, the U.S. economy expanded at a 2.78% annual rate in 2010. In 2011:Q1, the growth was only 1.75%. European nations went to a deep recession and still their growth is mostly negative, with double digits unemployment, and high inflation. Prices were going up drastically even though officials in every country manipulate the price indexes, trying to reduce inflation risk premium, hence, interest rates, pessimism of their citizens, and “improve” the financial markets. Also, tremendous debts9 and deficits,10 a credit-crunch (due to major problems in the mortgage market), and closed to zero savings shake the financial institutions and the global “integrated” financial system. A recession and an enormous unemployment, which is growing (with its unique characteristic the millions of jobs lost),11 has started in December of 2007 and was getting worse; has to wake up policy makers and to find ways to stabilize this inhumane “glob-onomics” or better planned “shock-onomics”. Over all, the lack of regulations, the same kind of people (the same club) working for the Financial Market (Wall Street) and then, they were appointed to the Federal Reserve, the government or to the regulatory agencies. These people care only for their interest and their group’s interest and not for the country’s interest and the citizens’ interest; they have created this current financial crisis with their speculations, their corruptions, and their ignorance. The U.S. economy is sinking (and people do not want to realize it, <<stourthokamilismos>>, στουρθοκαμηλισμός) because it depends only on financial services and on nothing else (no autarky and diversification in production); the primary (agriculture) and secondary (manufacturing) sectors have been abandoned, and its international policy is becoming from bad, worse. Then, we are wondering why so many people, today, have serious psychological, mental, and spiritual problems;12 the continuing wars in the Middle-East, the financial crisis, which has affected drastically the Euro-zone nations, have deteriorated this hopeless situation and many people are committed suicide.

 

II. A Recent Historical Retrospect of the Problem

In 1987, the Reagan administration removed Paul Volcker13 as chairman of the Federal Reserve Board and appointed Alan Greenspan in his place. Greenspan did a very “good” job, as it was planned.14 “By the late 1990s, Greenspan’s papal-size reputation for infallibility made insiders wary of challenging him. And then there was his masterful ability to silence internal critics when he grew weary of them.”15 He presided over two financial bubbles (the high-tech bubble of 1990s popped in 2000-2001 and the housing bubble burst in 2007-2008). The first responsibilities of a central bank should be to maintain the stability of the financial system, to sustain consumers’ and investors’ confidence, and to maximize social welfare for the country.16 If banks lend on the basis of artificially high asset prices, the result can be a meltdown because the economy cannot generate this in real wealth17 (it creates only an artificial market wealth, paper or accounting wealth that some can take advantage of it and become billionaires by selling these close to zero intrinsic value financial assets, for hundreds of dollars per share). To avoid the high-tech bubble, we could have increased interest rate, increased margin requirements to 100%,18 and controlled speculation through regulations. To deflate the housing bubble, we could have curbed predatory lending to low-income and high-risk households and prohibited other insidious practices (payment with commission to loan officers, no-documentation or “liar” loans, interest-only loans, no-down payment loans, etc.). In February 2006, when Ben Shalom Bernanke19 took over the Fed, he told during the ceremony: “My first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years.”20 Also, when Bernanke was at his ultimate interview for the Fed21 and was in the Oval Office with Bush, the president talked about “social security privatization at the time”.22 Of course, an economy, like the U.S. or the world economy should not rely on the instincts of a single man, but so far a few words from the Fed’s chairman move markets around the world because of the current imposed interdependence among countries, which is a fatal mistake.

On November 15, 1999, Congress repealed the Glass-Steagall Act of 1933 and the Financial Services Modernization (Gramm-Leach-Bliley) Act was passed.23 This new Act of deregulation changed the entire financial culture. Commercial banks were before not high-risk ventures, but they were managed hard-working people’s deposits very conservatively and the government would pay off in case of banks’ default (FDIC insurance). Investment banks were managed rich people’s excess wealth, who can take bigger risks (risk-seekers) in order to get bigger returns (or losses, which their costs are insignificants for these affluent people). Since 1999, when investment and commercial banks are the same institutions, it started a demand for the kind of high returns that could be obtained only through high leverage, cheating, manipulating, lying, and risk-taking. Also, in April 2004, the Securities and Exchange Commission (SEC) at a meeting24 allowed big investment banks to increase their debt-to-capital ration (from 12/1 to 30/1 or higher), so that they could buy more mortgage-backed securities and inflated the housing bubble even more in the process. The most important challenge was that posed by derivatives in the 21st-century deregulated markets.25

On June 7, 2001, came the Bush tax cuts, especially for upper-income Americans and corporations.26 But the rich people do not spend more, when their taxes are falling, then this fiscal stimulus did not help the economy. Consequently, the real stimulation was left to the Fed (monetary one), which reduced interest rates and provided a very high liquidity that made money readily available in financial and mortgage markets (even to those who would normally not be able to borrow). Then, the war in Iraq, the high budget deficit to finance it (and all the other open fronts around the world), depreciated the dollar and increased the oil and commodity prices.27 These succeeded in forestalling an economic downturn and household saving rate plummeted to zero and during 2005-2006 became negative.28 It was clear that U.S. were living on borrowed money, which was coming mostly from abroad. Also, the cut in tax rate on capital gains contributed to the crisis. Those who speculated and won were taxed more lightly than wage earners who simply worked hard. These policies encouraged leveraging, too, because interest on debt was tax-deductible (subsidized by tax payers). If someone borrowed a million to buy a home or took a $100,000 home-equity to buy stocks, the interest would be fully deductible every year. All these policies were providing an open invitation to excessive borrowing and because banks are profit maximizing institutions, they were encouraging lending (today’s people do not need any more encouragement for borrowing and consuming because they already, have become from persons consumers and spendthrifts).

In summer 2007, Bernanke assembled a group to deal with the emerging grim economic reality. They were, vice chairman Don Kohn, the levelheaded economist who had joined the Fed staff when Richard Nixon was president;29 Kevin Warsh,30 the well-connected Gen-X banker who had come to the Fed from the White House shortly after Bernanke had; and Tim Geithner,31 who was president of the N.Y. Fed and the baby-boomer protégé of Treasury secretaries Bob Rubin and Larry Summers. Frederic Mishkin who is Bernanke’s friend was left on the sidelines. But, in their August 7, 2007 meeting, the FOMC left the interest rate unchanged at 5.25% saying that “although the downside risks to growth have increased somewhat, the committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected”.32 The next day, Robert Rubin, the former Treasury Secretary and top Citigroup executive called Bernanke and said, “you did the right thing in not cutting rates”. On August 9, 2007, the French bank BNP Paribas made a startling announcement: it was suspending withdrawals from three funds that had invested in U.S. subprime mortgages. It could not put a value on the funds assets because of “the complete evaporation of liquidity in certain market segments of the U.S. securitization market”. This news was an unsettling to investors. Banks with cash husbanded it reluctant to lend even to other banks because they were no longer sure they would get paid back.33

In October 3, 2008, a bailout package passed, which provided $700 billion to restore confidence in the U.S. economy. But the banks had made too many bad loans, which have created big holes in their balance sheets. Treasury Secretary, Paul Paulson, was buying up the bad assets and putting the risk onto American taxpayers, hoping that banks would use this money to restart lending, but some of this money was paid as dividends to their shareholders or bonuses to their executives. Of course, the economy had been sustained by excessive borrowing for many years (with a total government and private sector debt, including contingent liability as of January 1, 2009 of over $174.1 trillion, $564,749 per capita, 1,315% of GDP).34 Also, unemployment35 was increasing and personal income and consumption were falling. Exports are declining and the revenue for state, local, and federal government is diminishing. The confidence level of consumers and investors had reached the lowest level since the introduction of these indexes. All these contingencies were affecting negatively the financial sector of the economy, which is the only sector left to sustain production, growth, and employment for the U.S. economy. The objective of the government, central bank,36 and the other authorities is to prevent crises, but these policy makers and regulators have lost power and consequently, control of the market and of the entire socio-political-economic system.

As the housing bubble burst, falling real estate prices reduced the value of houses (the collateral families had used to get mortgage loans) as well as the value of the mortgage-linked securities that banks held. The first phenomenon made borrowers much less appealing to lenders. The second ate into banks’ capital cushion; with less capital and the prospect of even more losses in the future, banks grew reluctant to lend. That further weakened the economy. Thus, on August 9, 2007, the global financial system started to crack because financial institutions’ holdings of mortgage-backed securities were worth less than they thought and had become very difficult to value. Banks’ uncertainty about their own level of capital and their ability to borrow made them unwilling to lend. Some financial institutions began to have trouble finding the short-term financing that was essential for them to carry on their daily operations. Fed officials created new innovative lending procedures in the form of the Term Auction Facility,37 the Primary Dealer Credit Facility,38 and the Term Securities Lending Facility.39 By lending both cash and securities based on collateral of questionable value, the Fed tried to bring order back to financial markets. The amounts involved were hundreds of billions of dollars.

This “planned” financial market turmoil of 2007, 2008, and 2009 has led to the most severe financial crisis since the Great Depression40 and was threatening to have large and lasting repercussions on the real economy, especially on employment. The bursting of the housing bubble forced banks to write down hundreds of billions of dollars in bad loans caused by mortgage delinquencies and the stock capitalization of the major banks declined drastically. The low interest rate policy by the Fed and the transformation of the banking system contributed to the current crisis. The traditional banking model, in which the issuing banks hold loans until they are repaid, was replaced by the “originate and distribute” banking model, in which loans are pooled, tranched, and then resold via securitization. The creation of these new securities facilitated a large capital inflow from abroad. These financial innovations made the banking system very unstable and uncertain by transferring risk to others and led to an unprecedented credit expansion that helped feed the boom in housing prices and in all financial assets. Since summer 2007, the TED spread41 started to widen, showing an increase in uncertainty, because during that period banks were charging higher interest for unsecured loans, which increased the LIBOR rate. Also, banks want to get first-rate collateral, which makes holding Treasury bonds more attractive and pushed down the Treasury bond rate. For these reasons, the TED spread widens in time of crises. In other words, the TED spread provides a useful basis for gauging the severity of the current liquidity crisis.42

The arrogant Wall Street that shaped the financial world for two decades, ended at 9 p.m. on September 21, 2008, when the Federal Reserve Board accepted applications from Goldman Sachs Inc. and Morgan Stanley to become banks (bank holding companies) because there is no future in remaining investment banks. These two firms are now regulated by the Fed, to build their deposit base, potentially through acquisitions. They will rely more heavily on deposits from retail customers instead of using money borrowed in the bond market. Securities firms had been regulated by the Securities and Exchange Commission, which future becomes dimmer.43 Japan’s MUFG was seeking to buy 20% of Morgan Stanley for as much as $9 billion. Nomura was acquiring certain Lehman operations in Asia.44 Also, Nomura acquired Lehman’s European and Mideast equities and investment-banking operations, a day after buying the firm’s Asian assets.45 Goldman Sachs was getting a $5 billion investment from Warren Buffet (he was buying perpetual preferred stock), marking one of the biggest expressions of confidence in the financial system. He bought another $5 billion in common stock later.46 After Lehman Brothers Holdings Inc. bankruptcy, Merrill Lynch & Co. rushed to be sold to Bank of America Corp.

At an annual United Nations General Assembly meeting, there were attacks on American-style capitalism. China and Russia advocated a more state-directed and interventionist brand of capitalism. French President Nicolas Sarkozy emerged as among the most aggressive of the world leaders at the U.N. calling for greater oversight of the world’s financial markets.47 The Brazilian President Luiz Inacio Lula da Silva said, the current global financial crisis was fueled by the “boundless greed” of speculators and bankers whose mistakes were being “borne by the masses”. The Iranian President, Mahmoud Ahmadinejad, told global leaders that the U.S. financial crisis, coupled with the wars in Iraq and Afghanistan, signaled that the American empire is “reaching the end of its road” and a small clique of “deceitful Zionists” were secretly manipulating the global financial system and deceiving the American and European people.48 The losses in this U.S. financial crisis exceed the $1 trillion.49 Big money-market fund investors were fleeing from commercial papers to three-month U.S. Treasury bills as they were looking for safety. This high demand for the T-bills pumped up their prices, which pulled down yields to 0.5% and later to 0.03%.50

Further, the bankruptcy of Lehman Brothers Holdings Inc.51 and IndyMac Bancorp sparked fears among banks that they would not be repaid by counterparties, driving up the cost of short-term loans between banks. Also, in September 2008, the U.S. seized the two largest mortgage-finance companies, Fannie Mae and Freddie Mac; Bear Stearns Co. (in March 2008) and Merrill Lynch & Co. agreed to sell themselves to Bank of America Corp.; American International Group Inc. was taken over by the Treasury; and Washington Mutual Inc.52 was seized by regulators in the biggest U.S. bank failure in history and sold to JPMorgan Chase & Co.53 Then, Wachovia was the latest casualty of the financial crisis.54 Bear Stearns Co. led to a hastily arranged rescue. Credit markets had frozen, credit spreads had widened and it was getting more difficult for businesses and consumers to get access to credit. Also, short-selling was crackdown to New York and London.

The volatility of the stock markets continued in the entire world. The Fed tried to help the markets by providing liquidity. The former Federal Reserve Chairman, Alan Greenspan, at a congressional hearing said that he “found a flaw” in his free-market ideology, which contributed to a “once-in-a-century credit tsunami” and “that is precisely the reason I was shocked because I’d been going for 40 years or more with very considerable evidence that it was working exceptionally well.”55 World-wide, stock valuations, at the end of October 2008, had fallen to a level roughly equivalent to the one that prevailed during the 1970s, according to Citigroup. On Tuesday, January 20, 2009, Barack Obama was sworn as the 44th U.S. president, calling on the nation to put aside greed and irresponsibility (that we have seen lately in this corrupted and uncontrolled value-free financial market) and “begin again the work of remaking America” at a time of war and recession. Mr. Obama called on Americans to return to the values of “hard work and honesty, courage and fair play, tolerance and curiosity” that have seen the country through past crises. Also, he said that “we reject as false the choice between our safety and our ideals”. But our greedy and corrupted financial market feared that the new government was going to control it or might nationalize some falling institutions (banks);56 investors reacted negatively by selling their shares and the DJIA posted its worst Inauguration Day performance ever, falling 332.13 points (-4.0%) to 7,949.09. The new U.S. president, Barack Obama, on his first day in office, issued new ethics rules and announced a wage freeze for White House staff earning more than a $100,000 per year. He aimed at making government more transparent and tightening ethics rules.

Also, the consumer confidence index in the U.S. fell to the lowest level on record in January 2009 to 37.7. Consumers were very pessimistic with the current state of the economy.57 At the start of the five-day World Economic Forum in Davos (Switzerland), economists said the fiscal-stimulus packages from Washington to Beijing would cushion the downturn, but fell short of preventing a world-wide recession. Chinese Premier Wen Jiabao squarely blamed the U.S.-led financial system for the world’s deepening economic slump, in that Davos meeting. Also, Vladimir Putin of Russia said, “investment banks, the pride of Wall Street, have virtually ceased to exist”.58 Further, Prime Minister Recep Tayyip Erdogan of Turkey gestured on a Davos stage toward Israeli President Shimon Peres during a heated exchange about Israel’s recent offensive in the Gaza Strip. Erdogan stormed off the stage afterward and said that he will never come back to Davos. When he arrived in Turkey, he was accepted by the crowd as a hero.59

Another, but positive think that appeared during this global downturn is economic nationalism. In the U.S., lawmakers were pushing to bar foreign suppliers for stimulus-funded projects.60 In Britain, workers at oil refineries and power plants walked off the job to protest the use of foreign labor. Spain was offering immigrants money to return home, while France was seeking to route many government-sponsored jobs to French companies.61 We hope the smaller countries in the EU to do the same and promote employment of their citizens, reduce crime, and protect the identity of their countries. Tariffs and other protections of the domestic economy are necessary, not only now, due to the recession, but always because countries have to support, first, their domestic economies and promote the welfare of their citizens. Free trade and free markets do not work in favor of the countries’ citizens. The WTO called a meeting to discuss this recent wave of protectionist measures, as governments scramble to save key industries.62 The House passed a new $819 billion stimulus bill, too.63 At the same time, a growing number of U.S. states were running out of cash to pay unemployment benefits.64 Czech President Klaus assailed the EU as undemocratic and said it should halt further centralization of powers.65 European leaders called for a doubling of IMF funds to help bail out former communist and current EU economies.66

President Obama asked Congress to move quickly to overhaul financial-system regulation.67 New revelations of corruptions of hedge-fund and money managers are coming up every day and the government has to regulate all these “white collar” criminals, who act against society’s well-being.68 New York’s biggest banks and securities firms relinquished 8 million square feet of office space in 2009, deepening the worst commercial property slump in more than a decade as they abandoned a record amount of property.69 President Barack Obama signaled a historic shift in the ideological direction of the U.S. economic policy on February 26, 2009, with a budget of $3.6 trillion for the fiscal year.70 Warren Buffett said the economy is in “shambles” and American International Group Inc. reported a $61.7 billion loss. So far the government had paid $173.3 billion to bailout AIG (the tax-payers now hold a nearly 80% stake in the firm). This was unethical, immoral, criminal, and against the social welfare of the nations. The responsible people for this crisis have to be persecuted and the structure of this system to change drastically, otherwise the U.S.A. will be bankrupt in the near future. The worst was that former CEO Greenberg said the government rescue of AIG has failed and should be replaced by a plan to restructure the company.71

The Federal Reserve and U.S. Treasury eliminated executive-compensation limits for sponsors of asset-backed securities accepted under a new $1 trillion program, indicating the rules might have hampered efforts to start the plan. The change suggested the government did not intend to apply compensation limits beyond firms that received direct investments from the Treasury’s $700 billion bailout fund. Officials had yet to announce whether such requirements would be imposed on firms participating in a separate effort to remove as much as $1 trillion of distressed assets from banks’ balance sheets.72 It seemed that the government has lost control and could not regulate the free-market. Testifying before the House Ways and Means Committee on the Obama administration’s 2010 budget, Geithner pledged to work with Congress to “determine the appropriate size and shape” of further bailouts. “As expensive as it already has been, our effort to stabilize the financial system might cost more,” Geithner said in prepared remarks. He urged lawmakers to “commit” to cutting the $1.3 trillion budget shortfall in the year 2009 and reiterated the administration’s pledge to cut it to $533 billion, or 3 percent of gross domestic product, by 2013. The Treasury chief told lawmakers that the administration would unveil a series of “legislative and enforcement measures” in coming months to crack down on companies and wealthy individuals who use offshore accounts to avoid paying taxes. The agency also planned to propose rules that would curb companies’ ability to delay paying U.S. tax on their foreign earnings, Geithner said.73 Further, the SEC proposed rules to limit short selling, but comments by Republican commissioners might signal a tussle ahead over some plans. Short selling causes downward stocks spiral and affects negatively investors confidence. The SEC already had taken action to restrict “naked” short selling (traders sell stock they have not borrowed).74

Foreclosure filings in the U.S. reached a record for the second consecutive year with 3.9 million notices sent to homeowners in default, RealtyTrac Inc. said. The year 2009 filings surpassed 2008’s total of 3.2 million as record unemployment and price erosion batter the housing market, the Irvine, California-based company said.75 In addition, China sold a record amount of its U.S. Treasury holdings in December 2009, ceding its place as the world’s biggest foreign holder of U.S. debt to Japan. After this action, Japan’s holdings of U.S. Treasurys were $768.88 billion and China’s $755.48 billion. The move triggered concerns about China’s continuing appetite to loan money to the U.S. amid a mounting budget deficit there and tensions between Washington and Beijing. The U.S. will have a serious problem in the near future, if China will stop buying U.S. financial assets.76 The U.S. posted its largest budget deficit on record in February 2010 as the government boosted spending to help revive the economy. The excess of spending over revenue increased to $221 billion in February 2010, compared with a deficit of $194 billion in February 2009, according to Treasury Department figures released in Washington. In fiscal 2009 that ended in September, the shortfall reached a record $1.4 trillion77 and in 2010 was $1.3 trillion.

Goldman Sachs Group Inc. was sued by U.S. regulators for fraud tied to collateralized debt obligations that contributed to the worst financial crisis since the Great Depression.78 The firm’s shares tumbled as much as 16 percent and financial stocks slumped on April 16, 2010. Goldman Sachs created and sold Collateralized Debt Obligations (CDOs) tied to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against them, the Securities and Exchange Commission said in a statement on April 16, 2010. Billionaire John Paulson’s firm earned $1 billion on the trade and was not accused of wrongdoing. The SEC also sued Fabrice Tourre, a Goldman Sachs vice president who helped create the CDOs.79

The literature, regarding the financial crisis and its causes, is huge; the financial press (The Wall Street Journal, The Financial Times, The New York Times, etc.), and all the news extensively deal with the issues in question, here. All academic journals have published hundreds of papers on the financial crisis and try to find a solution, but there is no solution because the market is more powerful than the governments. The financial crisis of the 2007-2010 caused serious problems to the Euro-zone member-nations. Thus, the EU asked the members, who have serious debt problems and were unable to borrow from the market to borrow from the Troika (EU, ECB, and IMF) as it happened with Greece, Ireland, and Portugal. But, these countries were suffering from the austerity measures that the anti-growth IMF80 imposed on them and their economies became worse; their citizens were suffering. Here, we face, today, an absolutely uncertain future with this interdependence of the nations that the world leaders (“followers”) have accepted without any resistance. This is a small presentation of some of the problems of our socio-economic system, which may be useful for the economic historian of the future.

 

III. Conclusion 

In summary, the global economy has sustained the most intense, destructive, and far-reaching financial shock since the Great Depression (the market, DJIA, declined then -89.2% and now -53.78%). A number of factors have contributed to it, from greed, corruption, deregulation, to risk-taking. The major financial institutions were not managing risk in a carful and prudent way. Credit rating agencies did not do their job impartially. Housing market has created a huge and risky bubble. Regulators were trusting financial markets that they were acting in favor of the social interest and they can be self-regulated. Corporate boards, executives, institutional investors, and government officials were maximizing their personal interest (there was a conflict of interest everywhere). But, at the core of this recent financial market crisis has been the discovery that tranches (structured securities) are actually far riskier than originally advertised.81 How is it possible that so many parties and entities did not have the capacity to analyze, foresee, and understand this tremendous risk of our global system that was transferring from one participant to the other, until some “smart” people decided to sell their overvalued and over-risky financial assets? Of course, by 2006, structured finance issuance led Wall Street to record revenue and compensation levels. Moody’s reported that 44% of its revenues came from rating structured finance products. By 2008, global issuance of collateralized debt obligations slowed to a crawl and Wall Street banks were forced to incur massive write-downs.82 A huge fraction of existing products (“asset-backed securities”)83 saw their ratings downgraded.

The planned “irrational exuberance” is over after three decades of deregulations, wastefulness, greediness, and corruption. But its negative consequences were expected because the economy and markets were too good to be true. We were living a big delusion and this deceit is over. The economic and social indicators reveal that the U.S. from a moral, ethical, and just superpower is becoming less and less competitive and less friendly with the rest of the world.84 European Union (the forced integration of 27 nations, without referenda), with its debt crises and the common currency, is the worst “innovation” in human history.85 It is a mixture of twenty seven nations without domestic public policies, without self-determination, without sovereignty, and of course, without any future.86 All these strange evolutions have increase the global uncertainty, have caused unemployment in EU87 and the U.S., have reduced competitiveness, and have augment anxiety and health problems (mental and physical) to citizens. The current fiscal austerity, imposed by the EU and IMF, will make the recession even deeper.88 The free-market system has failed and needs more government regulation and better corporate governance. The government had to bailout a corrupted financial system, even when the federal deficit and the national debt are astronomical.89 But, it had no other option, except to “rob responsible Americans and pay the robbers of the financial market”.90 Then, what are the social benefits? Why we need these global changes and “evolutions”, which are against humanity? The current financial crisis (with a combination of large failures, costly bailouts, and deep recessions) might be able to change the perception of the social welfare effects of the thirty years of deregulation. The Fed was instructed by Congress in 1977 to aim at “maximum employment” and “stable prices”, but it cares for price stability (Bernanke considers inflation target).91 Can we continue to hope with the current leadership, who is supporting a wrong socio-economic system?

   

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Endnotes

1 The uncontrolled debts and deficits appeared in all countries, in businesses, and in households and individuals. Savings from virtue (αρετή) became malice (κακόν).

2 “The publics of the world broadly embrace key tenets of economic globalization but fear the disruptions and downsides of participating in the global economy. In rich countries as well as poor ones, most people endorse free trade, multinational corporations and free markets. However, the latest Pew Global Attitudes survey of more than 45,000 people finds they are concerned about inequality, threats to their culture, threats to the environment and threats posed by immigration. Large majorities feel that faith in God is a necessary foundation for morality and good values, and similar majorities believe society should reject homosexuality. Together, these results reveal an evolving world view on globalization that is nuanced, ambivalent, and sometimes inherently contradictory.” (The Pew Global Attitudes Project, October 4, 2007).

3 Documentations for all these events are available from the author upon request. The working paper is 96 pages long and due to space limitations they are omitted, here.

5 The U.S. financial market peaked on October 9, 2007 (DJIA was 14,164.53) and troughed on March 9, 2009 (DJIA was 6,547.05); it declined by -7,617.48 points or -53.78%, and with calendar days to bottom 517. (Bloomberg.com). The loss of wealth was in tens of trillion of dollars, which was enormous for poor investors (from their private pension plans).

6 From 0.8525 $/€ (October 2000), the dollar fell to 1.6001 $/€ (April 2008); a depreciation by -87.70%. (Bloomberg.com). Lately, due to the enormous deficits and debts in the Euro-zone (PIIGS), the overvalued euro started to depreciate and reached 1.1960 $/€ (6/7/2010). Now, is back to 1.4837 $/€ (4/29/2011). (Bloomberg.com).

7 Gold prices have risen more than 366% in the last nine years an indication of high uncertainty for the investors, speculators, and opportunists. (Kitco.com and Bloomberg.com, 4/29/2011).

8 The real GDP growth was 2.1% p.a. in 2007, it became negative -0.8% p.a. in 2008, and fell to -2.4% in 2009. For the 3rd quarter of 2008, it was -2.7%, in the 4th one fell to -5.4%; in the 1st of 2009 became -6.43%, and in the 2nd one of 2009 was -0.7% (recession). See, Bureau of Economic Analysis (www.bea.gov) and economagic.com.

9 The credit cards rate is 30% p.a. for the poor people, due to high risk premium. Financial institutions have become usurers with the toleration of the government, which is completely unethical. We overcharge the poor and small businesses with high risk premia and at the same time, we tax them by buying lottery tickets (state taxes). The national debt was on May 17, 2011: $14.324 trillion. (The estimated population of the United States is 310,584,064 so each citizen’s share of this debt is $46,117.96. The National Debt has continued to increase an average of $4.01 billion per day since September 28, 2007). The U.S. will be soon in trouble; worse than the Euro-zone nations.

10 The U.S. began its fiscal year with a record $237.2 billion budget deficit in October 2008, reflecting bailout spending. (The Wall Street Journal, November 14, 2008, p. A1). U.S. congressional analysts were expected even more red ink; a record $1.8 trillion deficit for fiscal 2009, which complicated President Barack Obama's efforts to pass his $3.55 trillion budget plan for 2010. Due to continued economic weakness, the U.S. federal budget deficit was $1.3 trillion in fiscal 2010, the second highest recorded since 1945.

11 Every day, we hear more cuts in jobs. See, Bureau of Labor Statistics and Economagic.com.

12 Nearly 20% of young adults in the U.S. have personality disorders, a study in Archives of General Psychiatry found. (The Wall Street Journal, December 2, 2008, p. A1).

13 Paul Volcker had reduced inflation from 12% to 4%, had increased employment, and was in favor of regulations in financial markets. Reagan (those behind Reagan) wanted someone who believes in free-market and in globalization, which could deteriorate U.S. prosperity and control, so people can go against their own government and their own country. Then, the ground would be free for the new socio-politico-economic system: the global government.

14 Between 1986 and 1995, the government shuttered more than 1,000 Savings & Loan Associations with assets totaling over $500 billion, for a total cost that ended up at about $150 billion for the taxpayers.

15 See, Wessel (2009, p. 125).

16 But, Allan Meltzer has said that “Throughout its postwar history, the Fed has responded to the interests of large banks and Congress, not the public”. See, Wessel (2009, p. 157).

17 The real wealth can be created through production of goods mostly and services, that is added to the existing assets of the economy, and it generates the realistic (fair) compensation of these factors of production, which owned by individuals (private) and the government (public).

18 Margin requirements are 50% since January 3, 1974. See, Rose and Marquis (2008, p. 404).

19 Ben Shalom Bernanke (born December 13, 1953) is an economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis. Bernanke was a tenured professor at Princeton University and was chair of the Department of Economics there from 1996 to September 2002, when he went on public service leave. From 2002 until 2005, he served as a member of the Board of Governors of the Federal Reserve System. Here he outlined the Bernanke Doctrine and first spoke of The Great Moderation, where he postulated that we are in a new era, where modern macroeconomic policy has decreased the volatility of the business cycle. He then served as Chairman of President Gorge W. Bush's Council of Economic Advisers before President Bush appointed him to be Chairman of the United States Federal Reserve on February 1, 2006. Bernanke was confirmed for a second term as Chairman on January 28, 2010, after being nominated by President Barack Obama. Bernanke was born in North Augusta, South Carolina, and was raised in a ranch-style house on East Jefferson Street in Dillon, South Carolina. His father Philip was a pharmacist and part-time theater manager, and his mother Edna was an elementary schoolteacher. He is the eldest of three children, having a brother and sister. His younger brother, Seth, is a lawyer in Charlotte, North Carolina, and his younger sister, Sharon, is a longtime administrator at Berklee College of Music in Boston. The Bernankes were one of the few Jewish families in the area, attending a local synagogue called Ohav Shalom; as a child, Bernanke learned Hebrew from his maternal grandfather Harold Friedman, who was a professional hazzan, shochet, and Hebrew teacher. His father and uncle co-owned and managed a drugstore that they bought from his paternal grandfather, Jonas Bernanke. Jonas was born in Boryslav, Austria-Hungary (today part of Ukraine), on January 23, 1891, and emigrated to the United States from Przemysl, Poland (part of Austria-Hungary until 1918). He arrived at Ellis Island, aged 30, Thursday, June 30, 1921, with his wife Pauline, aged 25. On the ship's manifest, Jonas's occupation is listed as "clerk" and Pauline's as "doctor med." They moved to Dillon, South Carolina, from New York in the 1940s. Bernanke's mother often worked in the family drugstore, having given up her job as a school teacher when her son was born, and Bernanke also assisted from time to time.

20 Wessel (2009, p. 67) says that because his middle name translates as “peace”, he is inclined by nature to seek harmony (sic).

21 The other finalists were, Gregory Mankiw, John Taylor, Marty Feldstein, and Stephen Friedman. See, Wessel (2009, p. 83).

22 See, Wessel (2009, p. 77).

23 “This was the culmination of a $300 million lobbying effort by the banking and financial services industries and spearheaded in Congress by Senator Phil Gramm”, as Stiglitz (2009), who had opposed the repeal of Glass-Steagall Act, said.

24 During this meeting, the SEC argued for the virtues of self-regulation. This is impossible for every one and every institution because no one can effectively police himself. Self-regulation cannot identify systemic risks, since every one is using the same model, have the same objective, and act pro-cyclically.

25 In 1998, the head of the Commodity Futures Trading Commission, Brooksley Born, had called for regulations on derivatives; a concern that took on urgency after the Fed engineered the bailout of Long-Term Capital Management (a hedge fund whose trillion-dollar-plus failure threatened global financial markets). But Secretary of the Treasury, Robert Rubin, his deputy, Larry Summers, and Fed’s chairman, Alan Greenspan, were adamant and successful in their opposition, so nothing was done. Robert Edward Rubin served as the 70th United States Secretary of the Treasury during both the first and second Clinton administrations. Before his government service, he spent 26 years at Goldman Sachs. His most prominent post-government role was as Director and Senior Counselor of Citigroup, where he performed ongoing advisory and representational roles for the firm. From November to December 2007, he served temporarily as Chairman of Citigroup. On January 9, 2009 Citigroup announced his resignation, after having been criticized for his performance. He received more than $126 million in cash and stock during his eight years at Citigroup. Lawrence Henry "Larry" Summers is an American economist and the Director of the White House's National Economic Council for President Barack Obama. Summers is the Charles W. Eliot University Professor at Harvard University's Kennedy School of Government. He is the 1993 recipient of the John Bates Clark Medal for his work in several fields of economics and was Secretary of the Treasury for the last year and a half of the Bill Clinton administration. Summers also served as the 27th President of Harvard University from 2001 to 2006. Summers resigned as Harvard's president in the wake of controversy over a talk, in which he speculated that women may statistically have lesser aptitude for work in the highest levels of math and science. Summers has been criticized by some liberals for the centrist economic policies he advocated as Treasury Secretary and in later writings. Alan Greenspan was born in 1926 in the New York City. He was born into a Jewish family. The family of Herbert Greenspan, Alan's father, was of German descent. Alan’s mother, Rose Goldsmith was of Polish descent. He returned to college in 1945, attending New York University (NYU), where he received a B.S. in Economics in 1948 and an M.A. in Economics in 1950. Greenspan went on to Columbia University, intending to pursue advanced economic studies, but subsequently dropped out. At Columbia, Greenspan did study economics under the tutelage of future Fed chairman Arthur Burns, who constantly warned of the dangers of inflation. Much later, in 1977, NYU also awarded him a Ph.D. in Economics. Unfortunately, his dissertation is not available from NYU since it was removed at Greenspan's request in 1987, when he became Chairman of the Federal Reserve Board. However, a single copy has been found, and interestingly the 'introduction includes a discussion of soaring housing prices and their effect on consumer spending; it even anticipates a bursting housing bubble'. From 1948 to 1953, Greenspan worked as an economic analyst at The Conference Board, a business and industry oriented think-tank in New York City. From 1955 to 1987, when he was appointed as chairman of the Federal Reserve, Greenspan was chairman and president of Townsend-Greenspan & Co., Inc., an economic consulting firm in New York City, a 33-year stint interrupted only from 1974 to 1977 by his service as Chairman of the Council of Economic Advisors under President Gerald Ford. In the summer of 1968, Greenspan agreed to serve Richard Nixon as his coordinator on domestic policy in the nomination campaign. Greenspan also has served as a corporate director for Aluminum Company of America (Alcoa); Automatic Data Processing, Inc.; Capital Cities/ABC, Inc.; General Foods, Inc.; J.P. Morgan & Co., Inc.; Morgan Guaranty Trust Company of New York; Mobil Corporation; and The Pittston Company. He was a director of the Council on Foreign Relations foreign policy organization between 1982 and 1988. He also served as a member of the influential Washington-based financial advisory body, the Group of Thirty in 1984. Alan Greenspan has been married twice. His first marriage was to an artist named Joan Mitchell in 1952; the marriage ended in annulment less than a year later. He dated newswoman Barbara Walters in the late 1970s. In 1984, Greenspan began dating journalist Andrea Mitchell. Greenspan at the time was 58, and the also divorced Mitchell was 20 years younger. In 1997, they were married by Supreme Court Justice Ruth Bader Ginsburg. (Wikipedia.org). How these people can be in favor of regulations? How is it possible that these people care for the social interest?

26 Corporations do not pay taxes in the U.S. and in the most of the countries and in case that they have a problem the government bail them out with taxpayers money. In 2010, GE reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States. Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion. This system is actually against its own citizens. See, http://www.nytimes.com/2011/03/25/business/economy/25tax.html?_r=2&hp

27 See, Kallianiotis (2008).

28 The U.S. personal saving rate became in 2005M07: -1.4%, in 2005M08: -3.4%, in 2005M09: -0.5%, in 2005M10: -0.1%, in 2005M11: -0.2%, in 2005M12: -0.7%, in 2006M07: -0.3%, in 2006M08: -0.1%, and in 2007M11: -0.5%. (Economagic.com).

29 Kohn (Alan Greenspan’s closest adviser) had never worked outside the Fed. See, Wessel (2009, pp. 106-107). Kohn retired from Fed in June 2010.

30 Kevin Maxwell Warsh (born April 13, 1970) was a member of the Board of Governors of the Federal Reserve System. He took office on February 24, 2006 to fill an unexpired term ending January 31, 2018 and resigned his position effective March 31, 2011. He was the youngest appointee in Federal Reserve history. From 1995 to 2002, Warsh worked for Morgan Stanley in New York City, ultimately becoming a Vice President and Executive Director in the company's Mergers and Acquisitions Department. From 2002 to 2006, Warsh was Special Assistant to the President for Economic Policy, and Executive Secretary of the National Economic Council. His primary areas of responsibility included domestic finance, banking and securities regulatory policy, and consumer protection. He advised the President and senior administration officials on issues related to the U.S. economy, particularly fund flows in the capital markets, securities, banking, and insurance issues. Warsh participated in the President's Working Group on Financial Markets and served as the administration's chief liaison to the independent financial regulatory agencies. President Bush nominated Warsh and Randall Kroszner to fill two Fed vacancies on January 27, 2006. Warsh's nomination drew some criticism, based on his age and inexperience. At 35 years old, Warsh was the youngest appointment in the history of the Federal Reserve. At the time, former Fed vice chairman Preston Martin said Warsh's nomination was "not a good idea" and that if he had a voice in the Senate, he would vote no. However, Warsh impressed colleagues, especially Fed Chairman Ben Shalom Bernanke, with his insights and political savvy, and he has played a significant role in navigating the financial market turmoil of 2007 and 2008. Warsh announced his intent to resign from his position on the Board of Governors in a letter sent to President Obama on February 10, 2011. The letter states that he was to resign around or on March 31, 2011. In 2002, Warsh married Jane Lauder, a granddaughter and heiress of Estee Lauder (currently General Manager of Origins, an Estee Lauder company).

31 Tim Geithner (Treasury Secretary) spent most of his childhood overseas. He returned to the U.S. to attend Dartmouth College and graduate school at Johns Hopkins University. Then, Geithner had a stint at Henry Kissinger’s consulting firm before joining the Treasury in 1988 as a career bureaucrat. For a time, he was the Treasury’s attaché in Tokyo, but after he came back to Washington, Rubin and Summers promoted him rapidly. He entered the Clinton administration as undersecretary for international affairs, the position Summers had started in 1993. Geithner was at the epicenter of the U.S. government’s response to the Mexican and Asian financial crises of the 1990s. Geithner often was seen as too close to the banks, too ready to rush to their rescue. Some of this came with the job, and some of it reflected his long-standing ties to Bob Rubin at Citigroup, the largest of the banks under the New York Fed’s supervision. See Wessel (2009, pp. 112-114).

32 See, Wessel (2009, p. 100).

33 See, Wessel (2009, p. 101).

34 The government sector debt (including contingent liability) is $129.6 trillion; the private sector debt is $44 trillion; the sum of all debt is $174.1 trillion. Excluding contingent liability (un-funded Social Security, un-funded Medicare, un-funded Medicaid, un-funded federal employee pension, un-funded federal employee medical, un-funded state & local government employee pension & medical) the sum of all government plus private sector debt is $56.9 trillion, from which $13.6 trillion (24%) it is owed to international entities ($3.2 trillion owed by federal government plus $10.4 trillion by private sector). This total debt of $56.9 trillion is 499% of Net National Income. The U.S. is in real trouble with this tremendous debt and its future is very uncertain and due to globalization, the world’s future is questionable. Dark powers will take advantage of these negative real savings and will cause serious financial crises in the near future; so they can pursue their ultimate objective, the global slavery. See, Grandfather Debt Summary Tables Report, by M. W. Hodges.

35 The unemployment rate was 8.1% in February and increased to 8.5% in March 2009. (Economagic.com). The U.S. unemployment rate jumped in March to the highest level since 1983 as the economy lost 663,000 jobs, threatening to keep spending subdued for months and delay any recovery. Employers had cut a total of about 5.1 million posts since the recession began, the biggest slump in the postwar era. (Bloomberg.com, April 3, 2009). In October 2009, unemployment reached 10.1%. (http://www.bls.gov/). Now (July 2010), it is 9.5% and does not seem that it is going to fall very soon and has affected negatively the stock market. (The Wall Street Journal, July 2, 2010).

36 During a hearing on Capitol Hill, Alan Greenspan said that, “I have found a flaw” in our system. Congressman Henry Waxman pushed him responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working”. “Absolutely, precisely”, Greenspan said. The evidence have shown to everyone that the philosophical systems (capitalism=the sub-culture of waste and communism=the sub-culture of oppression), which this (the same) group of people have imposed on societies for more than three centuries do not work, but satisfy their false needs for global hegemony and universal slavery. Of course, we (who know the truth) will say NO to them!

37 Any one of the more than 7,000 commercial banks can bid in the auction mechanism to receive reserves from Fed since December 2007. This TAF removes the stigma associated with discount borrowing. The Fed started lending reserves in substantial quantities for relatively long periods (28 or 35 days). As the Fed increased lending, it reduced its outright securities holdings in equal measure, leaving the total size of the Fed balance sheet unaffected. See, Cecchetti (2009).

38 The PDCF allows the 19 primary dealers, who are not banks, but are investment banks and brokers, and participate in daily open market operations and the Treasury auctions, to (from March 16, 2008) borrow directly from the Federal Reserve discount loans (like commercial banks) and pledge a relatively broad set of collateral including investment-grade corporate securities, municipal securities, mortgage-backed securities, and asset-backed securities for which a price is available. See, Cecchetti (2009).

39 In winter 2008, the U.S. Treasury securities of all varieties became extremely scarce and these Treasurys are necessary as collateral on repurchase agreements. The Fed created the TSLF, which allows dealers to obtain Treasurys in exchange for “AAA/Aaa-rated private-label residential MBS (mortgage-backed securities) not on review for downgrade”.

40 Here is the comparison of the bear markets during the Great Depression and the last one in the DJIA: Great Depression: Peak on September 3, 1929 (DJIA was 381.17), trough on July 8, 1932 (DJIA was 41.22), a decline by 339.95 points or –89.2%, and with calendar days to bottom 1,038. Current Credit Crunch: Peak on October 9, 2007 (DJIA was 14,164.53), trough on March 9, 2009 (DJIA was 6,547.05), a huge and drastic decline by 7,617.48 points or -53.78%, and with calendar days to bottom 517. See, Kallianiotis (2009).

41 TED spread = , where RF is the 3-month U.S. Treasury bill rate.

42 See, Brunnermeier (2009).

43 These changes are likely to lead to less risk-taking by the companies. Goldman’s CEO and two co-presidents were each paid more than $67 million in 2007. But the days of high leverage and big bonuses must go for the improvement of the social welfare. (Bloomberg.com, September 22, 2008).

44 See, The Wall Street Journal, September 23, 2008, pp. A1 and C1.

45 See, The Wall Street Journal, September 24, 2008, pp. A1 and C2.

46 See, The Wall Street Journal, September 24, 2008, pp. A1 and A10.

47 Sarkozy said: “The U.S. financial crisis is the worse that the world has experienced since that of the 1930s. … Let us rebuild together a regulated capitalism in which whole swathes of financial activity are not left to the sole judgment of market operators.” (The Wall Street Journal, September 24, 2008, p. A10).

48 See, The Wall Street Journal, September 24, 2008, p. A10 .

49 Comparing losses in financial crises, in billions of 2007 dollars: (1) U.S. savings and loan (1986-1995): $273 billion. (2) Japan banking crisis (1990-1999): $745 billion. (3) Asia banking crisis (1998-1999): $404 billion. (4) U.S. credit crisis (2007-2008): $1,000 billion. (The Wall Street Journal, September 25, 2008, p. A1).

50 See, The Wall Street Journal, September 25, 2008, pp. A1, C1, and C2. Also, Economagic.com (December 2008).

51 Lehman, on September 15, 2008, had as CEO, Richard Fuld, was employed 25,158 employees, and its cash on balance sheet was $3.3 billion. On January 1, 2009, its Chief Restructuring officer was Bryan Marsal, it employed 509 people, and its cash on balance sheet was $7 billion, but the company is bankrupt. (The Wall Street Journal, February 2, 2009, pp. A1and A14).

52 WaMu was a thrift whose primary business was mortgage related. It also had $188 billion in deposits. It had 2,300 branches and its assets were $310 billion. Wachovia had a total of $167 billion in mortgages as of June 30, 2008, ranking second among U.S. lenders behind Bank of America Corp.’s $239 billion, and followed by Citigroup Inc.’s $145 billion. (Bloomberg.com, September 26, 2008).

53 JPMorgan acquired WaMu’s branch network for $1.9 billion. (Bloomberg.com, September 26, 2008).

54 Wachovia was bought by Wells Fargo.

55 Greenspan opposed increasing financial supervision as Fed chairman from August 1987 to January 2006. (Bloomberg.com, 10/23/2008).

56 Bank of America posted a $1.79 billion loss, hurt by rising credit costs, and defended its purchase of Merrill. Citigroup had an $8.3 billion loss. The same problems existed in European banks, too. (The Wall Street Journal, January 17-18, 2009, pp. A1 and B3).

57 See, Bloomberg.com, January 27, 2009.

58 See, The Wall Street Journal, January 29, 2009, pp. A1 and A6.

59 See, The Wall Street Journal, January 30, 2009, pp. A1 and A6. How these pashas become so “good” politicians competing with the West’s ones?

60 Also, the U.S. Commerce Department began an investigation into whether to impose antidumping duties on imports of some steel pipes from China. (The Wall Street Journal, October 8, 2009, pp. A1 and A6).

61 See, The Wall Street Journal, January 31-February 1, 2009, pp. A1 and A2. France tried to deport many Afghan illegal immigrants, too. TV News ALTER, 10/7/2009. The only country that is protecting illegal immigrants is Greece; actually, her communist, socialist, and centrist parties, which is completely, an anti-Greeks policy. Some very suspicious is going on, here.

62 See, The Wall Street Journal, February 6, 2009, pp. A1 and A6.

63 See, The Wall Street Journal, January 29, 2009, pp. A1 and A3.

64 See, The Wall Street Journal, February 6, 2009, pp. A1 and A3.

65 Czech Republic had the Presidency of the EU during the first half of 2009. See, The Wall Street Journal, February 20, 2009, pp. A1 and A11. At least, someone said the truth regarding this anti-European EU.

66 See, The Wall Street Journal, February 23, 2009, pp. A1 and A6.

67 See, The Wall Street Journal, February 26, 2009, pp. A1 and A2.

68 Authorities claimed that hedge-fund manager, Paul Greenwood, and his associate Stephen Walsh spent lavishly on horses, houses, and collectible teddy bears. They were accused of misappropriating at least $553 million, the latest in a series of allegations of major financial fraud. (The Wall Street Journal, February 26, 2009, pp. A1 and A6).

69 JP Morgan Chase & Co., Citigroup Inc., bankrupt Lehman Brothers Holdings Inc. and industry rivals had vacated 4.6 million feet, a figure that might climb by another 4 million as businesses left or sublet space they no longer needed, according CB Richard Ellis Group Inc., the largest commercial property broker. Banks, brokers and insurers had fired more than 177,000 employees in the Americas as the recession and credit crisis battered balance sheets. Financial services firms occupied about a quarter of Manhattan’s 362 million square feet of office space and account for almost 40 percent now available for sublease, CB Richard Ellis data showed. See, Bloomberg.com, February 26, 2009.

70 President Obama said: “This crisis is neither the result of a normal turn of the business cycle nor an accident of history. We arrived at this point as a result of an era of profound irresponsibility that engulfed both private and public institutions from some of our largest companies’ executive suites to the seats of power in Washington, D.C.” See, The Wall Street Journal, February 27, 2009, pp. A1, A5, A6, A8, and A10.

71 See, The Wall Street Journal, April 3, 2009, pp. A1and C3.

72 The rules would not apply to the Term Asset-Backed Securities Loan Facility because of the government’s “desire to encourage market participants to stimulate credit formation and utilize the facility,” the New York Fed said in a question-and-answer document on its Web site on March 3, 2009. The government also signaled it would use the program to support additional credit markets. Bloomberg.com, March 3, 2009.

73 That day’s hearing marked Geithner’s first appearance before the panel that writes U.S. tax law. His nomination faced resistance earlier in 2009 in the Senate after Geithner, who oversees the Internal Revenue Service, agreed to repay almost $50,000 in back taxes and penalties. See, Bloomberg.com, March 3, 2009.

74 Financial institutions blamed hedge funds and others for driving their stocks lower, particularly during bouts of market volatility, such as the one in fall 2008, around the collapse of Lehman Brothers Holdings Inc. See, The Wall Street Journal, April 9, 2009, pp. A1 and C1.

75 Bloomberg.com, December 10, 2009.

76 China pared its U.S. Treasury holdings by $34 billion in December 2009. See, The Wall Street Journal, February 17, 2010, pp. A1 and A8.

77 Bloomberg.com, March 10, 2010.

78 Goldman Sachs was involved with Kostas Semites manipulation of financial data of Greece to enslave her to Euro-zone. This needs a lot of investigation, too.

79 See, Bloomberg.com, April 16, 2010. Collateralized debt obligations (CDOs) are a type of structured asset-backed securities (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets. CDOs securities are split into different risk classes, or tranches, whereby "senior" tranches are considered the safest securities. Interest and principal payments are made in order of seniority, so that junior tranches offer higher coupon payments (and interest rates) or lower prices to compensate for additional default risk. A few academics, analysts and investors such as Warren Buffett and the IMF’s former chief economist Raghuram Rajan warned that CDOs, other ABSs and other derivatives spread risk and uncertainty about the value of the underlying assets more widely, rather than reduce risk through diversification. Following the onset of the 2007-2008 credit crunch, this view has gained substantial credibility. Credit rating agencies failed to adequately account for large risks (like a nationwide collapse of housing values) when rating CDOs and other ABSs. Many CDOs are valued on a mark to market basis and thus have experienced substantial write-downs on the balance sheet as their market value has collapsed. Further, the SEC, having hit Goldman with a civil fraud charge, was investigating other mortgage deals arranged by some of Wall Street’s biggest firms. (The Wall Street Journal, April 19, 2010, pp. A1 and A4).

80 The IMF chief Dominique Strauss-Kahn awaits his first court appearance on attempted rape charges after giving police permission to examine him for physical evidence of scratches and DNA from his accuser. The alleged attack on a 32-year-old female maid at a Sofitel hotel in midtown Manhattan occurred May 14, according to the New York Police Department. Strauss-Kahn, who was taken into custody aboard an Air France flight at John F. Kennedy International Airport as it prepared to depart, also was charged with unlawful imprisonment and a criminal sex act. He remains in custody until an 11 a.m. hearing in Manhattan criminal court. A potential candidate for the French presidency, Strauss- Kahn, 62, has denied the charges and will plead not guilty, his lawyer Benjamin Brafman said. The IMF chief was picked out of a lineup on May 15, 2011 by the maid, police said. His arraignment, during which bail terms may be set, had been scheduled for May 15 and was delayed after investigators sought a warrant for a physical examination of Strauss-Kahn. See, Bloomberg.com, May 16, 2011 and The Wall Street Journal, May 16, 2011, pp. A1 and A6.

81 The essence of structured finance activities is the pooling of economic assets (loans, bonds, mortgages) and the subsequent issuance of a prioritized capital structure of claims, known as tranches, against these collateral pools. The process of securitization allowed trillion of dollars of risky assets to be transformed into securities that were widely considered to be safe (virtually risk-free) and certified as such by the rating agencies. See, Coval, Jurek, and Stafford (2009) and Eiteman, Stonehill, and Moffett (2010, pp. 106-134).

82 Rating agency revenues from rating structured finance products disappeared virtually overnight and their stock prices of these companies fell by 50%. See, Coval, Jurek, and Stafford (2009).

83 Collateralized debt obligations are comprised of pools of mortgages, credit card, and auto loan securities. But, 27 of the 30 tranches of asset-backed collateralized debt obligations underwritten by Merrill Lynch in 2007 saw their triple-A ratings downgraded to “junk”. In 2007, Moody’s downgraded 31% of all tranches for asset-backed collateralized debt obligations it had rated and 14% of those initially rated AAA. By mid-2008, structured finance activity was effectively shut down. See, Coval, Jurek, and Stafford (2009).

84 The U.S.A. was the biggest economic power in the world and is declining daily. Greece was the biggest spiritual power on earth and is descending daily. We must grieve for the plight of these two nations and someone is responsible for this. The problem must be the bad and controlled leadership in these two “model” nations.

85 The ECB occupies a gleaming thirty-seven-story skyscraper in Frankfurt’s financial district and its objective is to avoid another intra-European war and to rival the United States. Both the Fed and ECB were structured as political compromises. The Fed has only one set of elected politicians to cope with; the ECB has at the moment sixteen (16 EMU country-members). The legal mandate is for the first to maximize employment and price stability; for the second is to resist inflation. Both central banks are designed to be independent, but they are not. Both concentrate on the same intermediate objectives: credit and liquidity. The central banks can create money (“printing money”, which is electronic).

86 For example, in EU, 73.8% are against privatization, 80.9% are against Turkey’s entrance to EU, 83.6% are against Euro-constitution (Treaty of Lisbon), 71.6% want to go back to their previous national currencies, 71.5% of Greeks are in favor of vetoing Skopje’s (Vardarska’s) entrance to NATO and EU, Europeans are against the independence of Kosovo, and 86.1% of Greeks are against the marriage of homosexuals. (e-grammes.gr., different polls). Europeans are actually against this “anti-European creature”, the EU.

87 The main reason, for unemployment in Europe, is the illegal and uncontrolled immigration and also, the free mobility of factors, products, and services. Europe is in trouble to lose its thousands years old identity.

88 President Barak Obama worried about these austerities that the fragile world economy could slip back into recession as in the 1930s. He urged the G-20 leaders to continue some level of stimulative spending. (The Wall Street Journal, June 22, 2010, pp. A1 and A9).

89 The U.S. budget deficit for the 2008 was $455 billion and the national debt was $10,311 billion on October 15, 2008 and for the 2009 the deficit became $1,600 billion (11.2% of GDP); on October 29, 2009 the debt became $11,897 billion (91.42% of GDP). Now (8/12/2010), the ND was $13,327.4 billion (100.84% of the GDP). See, Economagic.com.

90 Dr. Shannon Grimes in Tahlequah Daily Press, September 25, 2008.

91 The ECB, the Bank of England, and the Bank of Japan have only one explicit goal: price stability. See, Wessel (2009, p. 86).

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