tv [untitled] CSPAN June 22, 2009 1:00am-1:30am EDT
mckay, the first coach of the tampa tamp buccaneers, who unfortunately went zero wins and 16 losses in their first season of pro football. in the lockerroom after the last game, coach mckay was asked by a journalist what the thought about the execution of his team on the field, and mckay said he was all in favor of it. [laughter] ...
unregulated market suggesting such a downturn as normal, that it is part of a normal business cycle. that was completely unavoidable. arguing that it was almost like an act of god as random and unpredictable and natural as a 100-year-old flood to use greenspan's language. there is nothing immoral about what the world is experiencing today. to suggest otherwise smacks of a let them eat cake il elitism that shows alan greenspan is removed from the actual pain and suffering the crisis is causing the average american family. similarly, be suspicious of those that try to blame capitalism generally for the crisis. capitalism has done more to create growth and reduce poverty and inequality in the world than any economic system in the history of the world. let's be careful not to throw out the baby capitalism with the
bathwater. a global capitalism knows no country borders and recognizes no national boundaries so it is not surprising that it has helped -- is this working -- it is not surprising it has helped the worst of the world in china and india and asia the most in a scathing poverty even if it meant a great hardship to the middle class and u.s. and in europe. but if you look past the nationality what is wrong with helping the poorest of the world first? finally, always hold last as an explanation of the situation you don't completely understand an accusation that those who participated or caused the crisis were somehow irrational or even stupid. i work with these folks on wall street for ten years and i can promise you there are many things but they are not stupid. similarly, to blame the crisis
on wall street by calling wall street greedy seems to miss the point. greek is what will street does and has always done. there is no wall street without greed. why else would someone else watch his life disappeared as he watched a 19-inch computer screen only to grab a morsel or, of profit to get rich. greed has been in our genes for hundreds of thousands of years. the jeans have not mutated suddenly in the last 30 years to make us more greedy. and to those behavioral economists out there who are quick to accuse others of irrational behavior i can think of no greater public pronouncement of your own inability to identify the causes of the problem than trying to label of those around you as irrational. it is a very dangerous game he wore playing because it lays the seeds of an argument that says what we need is greater
protection from our irrational selves and who is always there to offer the service? and elite class of bureaucrats who pretend to know more about what makes me happy the and i know myself. it behaviorists are ever able to prove that markets or most of the participants are a rational, it will be a very sad day for those of us who love and told dear of individual freedom, individual choice and basic rights as humans. if the key participants in the current financial crisis work irrational, please help me identify kuwait was that was irrational. who are we talking about? was it the home buyers real-estate agent earning 20 to 50,000-dollar commissions with no risk but only if his or her client was the winning buyer? d.c. why was in their interest to get them to buy more, not less? certainly on ethical and unprofessional but not
irrational from their perspective. with a vast number of financial middleman from the appraisers putting out crazy high appraisals for a fee to the rating agencies who are paid billions of dollars to call john security aaa to the congressmen who took bribes to loosen industry regulation to the investment bankers paid hundreds of billions to peddle this stuff to the mortgage brokers who falsified mortgage applications to guarantee approval, again, highly unethical and in some cases completely criminal but not irrational. what about the home buyer himself? certainly he was irrational to pay 50 to 60% premiums more than the homes worth. but what if i told you that most of these home buyers were pleading with other people's money? that they had borrowed all the money they needed at two or three per cent with no down payment of their own funds. certainly a terrible way to arrive at a fair price for a
home but such would be motivated to buy the biggest home he could as he would want to maximize his upside profit in a booming market. he would be in sensitive to price as he knew he would enjoy all the upside but if the market turned sour if he could avoid any loss by allowing the bank to take property back in foreclosure. sounds pretty rational to me. if the borrower is getting such a sweet deal, surely the lender, his commercial banker was acting irrational and giving him alone. but the world of commercial banking has changed dramatically last 25 years. banks today don't sell loans they make. they securitized them and sell them upstream to big principal investors like pension funds, sovereign governments, municipalities and insurance companies. the commercial banker has few rational reasons to care about
the quality of the loan that he's created. if it defaults he won't lose anything. we now know that some of these banks did indeed position some of the toxic waste on their own balance sheets. and their losses turned out to be huge, excuse me. large enough to bankrupt many firms. sounds pretty stupid, doesn't it? but what if i told you the same banks were making tens if not hundreds of billions of dollars in profit from their mortgage operations and bank managers had seen their bonuses increase from less than a million dollars a year to something sometimes more than $50 million per year. now it doesn't sound so crazy or stupid, does it? so at the end of this on ethical fraudulent most likely criminal food chain stands the principal investor, the pension fund or insurance company that got stuck holding this worthless paper. certainly he or she has to be
stupid or irrational to have made such a poor investment. actually, no. while many of these institutional type of investors are not the sharpest minds in the tour, they did do what modern finance theory told them to do. the diversified their holdings but they didn't sell well that they killed so many different investments, spread all over the world that they couldn't possibly find time to evaluate them or analyze their value and they certainly didn't have time to supervise the individual managers of each of the underlying companies and assets they held. in addition, their most trusted advisers were telling them fees were safe investments and all three of the rating agencies were giving these investments highest rating, aaa. to call the victim of such a fraudulent attempt to deceive irrational would be like calling the victim of a home burglary or
car theft irrational. we may not like or approve of such behavior but that doesn't make the victim irrational or necessarily stupid. so maybe there are reasons this crisis occurred but haven't as yet been discovered and it is found would prevent from throwing out our beloved baby capitalism or calling those involved either stupid or irrational. maybe there's something about the banking industry itself that makes it different from other industries and makes it ill suited for the type of competitive capitalism that seems to create long-term sustainable values and other industries in which competition is encouraged and allowed to foster. bank deposit insurance guarantees were instituted in the 1930's to stop runs on banks during the great depression. but they may have created the very moral hazard that is causing today's financial crisis. quite ironic, isn't it?
banks today can dramatically increase their leverage, shift into risky assets suggest your negatives and businesses like investment-banking and they won't lose depositors and they won't even see the cost of their debt funding increase because of the guaranteed provided by the federal government to the depositors. in the 30's when depositor insurance was introduced everyone understood banks with their would have to be regulated by the government since the market no longer could. unfortunately, over time this lesson was lost or forgotten. the banks over the last 30 years have used their increased lobbying and political strength to undo and eliminate most of the original legislation and to effectively regulate them. in 1999 they got last stiegel removed so they could get into the investment banking business.
in 2000, they were successful in assuring that the derivatives business would remain on regulated. in 2004 they lobbied successfully to remove restrictions on how high the leverage might go and as we have seen the leverage over the last 30 years has increased from about eight to one to something like 30 or 40 to one. over the years, banks have used their size, power and political muscle to rewrite rules of the game to benefit themselves but at the same time threatened the entire financial system with collapse. did i mention these same all powerful banks also owned and controlled federal reserve system and its board. these banks are so large as to be, quote, too big to fail, and of quote, which violates the first premise of capitalism that badly performing businesses must
be allowed to fail. because of the heavy involvement in the credit default swap markets, these banks are also too interconnected to fail. credit stifel swap market makes everybody important and too big to fail because of its huge complex network of the fault guarantees. it also violates the precept markets must allow failure for creative destruction to her and because of this, the credit default swap market needs to be shut down immediately. banks as we have said are also highly leveraged that it becomes when you are so highly leveraged rational for the management teams and shareholders to begin to act like option holders worry only about the upside rather than equity investors who must also be concerned with downside scenarios and the risk of insolvency. i believe if we made just one change, if we limited leverage
of the banks in the world to just eight to one we would eliminate the major cause of most bilmes and meaning as and avoid almost all future boss, recessions, crises and depressions. we have new leadership in washington of course, and they were elected on a promising platform dedicated to change. radicals like me will never be happy with the pace of change especially as innocent families suffer as the result of this crisis. if it were me, i would attack the biggest problem first, the corrosive impact that money and lobbyists and corporate power has in the nation's capital but i would most likely fail. the powers that be congressional incumbents of both parties, big banks and big corporations and lobbyists and the corporate owned sponsored and controlled media would swat me away like the annoying pests, authors and
true investigative journalists can be. but barack obama has a different approach. his years of community organizing experience taught him to accomplish real meaningful change especially against an entrenched and paul wooful opponent you take small steps first. you move gradually. you move incrementally. nothing builds a group's confidence like success. you can build a powerful majority of three involved citizens by winning small battles first before taking on the big battle against the machine, against the system. then once you have real power and there is no power than people united, then and only then do you accomplish reform and bring change to the corrupt system. thanks for listening. i would like to open the floor for questions, and please remember there is no such thing as a stupid question especially given how complex this is.
if any of you listening would like to get involved in trying to figure out how we can organize ordinary americans to clean up their government and through the corporate lobbyists out of washington, please contact me at my e-mail address, email@example.com, that's firstname.lastname@example.org. i have got some ideas, but i would very much like to hear yours. i will open up the floor to questions now. >> i don't think it's working. >> anyway, i will talk louder. >> he says it's working. >> is? okay. i'm sorry. my question is twofold and then completely disparate. one is obviously you think
glass-steagall should be reinstated, number one. number two, what is your concern about inflation in light of all the deficits that we are incurring? thank you. >> i absolutely think glass-steagall ought to be reinstituted. something stronger because the world has changed in 70 years. we have to have a prohibition against banks getting into risky businesses. it makes no sense for you to deposit your money into a bank expecting you can get it back and find out the managers of the bank have gone in debt in derivatives and investment banking and hedge fund type of activities. so, absolutely something even stronger than glass stiegel needs to be reinstituted. second half of the question is a good question. i am a big supporter of the few ways you can't spend $4 trillion guarantee some $13 trillion of assets and not have significant government costs going forward and if the government has significant costs going forward
it isn't clear where they will get the money by their own projection they are showing 2 trillion-dollar deficits each year and that forecast allows 4% growth from 2011 and all and i just don't see how we are going to get back on the growth record, so we are going to find the basic operations of the country putting out $2 trillion a year of new debt borrowings and then we have all these guarantees that might come back to haunt us and so it looks to me like the banks haven't finished with all of their losses, it's not crazy to think your point to print some of that rather than borrow it and if they turn on the printing press we are going to have inflation. warren buffett said when the treasury's were yielding 2% it was the next media or boom and was crazy for the countries to be lending the u.s. government in your money at 2% and that rate has jumped considerably and
i think it's going to jump more. what it tells you as an investor is be careful if a bond salesman tries to move to out of the stock market and into the corporate bonds or treasuries. they have a price risk to them if inflation comes back. >> i think it can be easily argued the majority of the populism of the nation don't even slightly understand the complexity of economic situations, wall street, what have you come and the way the media presented it just ends up scaring more and more people into believing what ever is the scariest myth, so how do you propose guinn for word that we handle the media's affect on the populations you on economy and how do you propose leges educating educating the people
on the level of understanding where their money goes and what happens? >> we are not so different than other countries of the world right now. unfortunately almost hear similar to our the developing pour countries of we have become argentina and stuff argentina becoming like this. if there's 100 of the world and country's poor share in common is the dictator or somebody controls the legislature so it's hard for the people to write reform legislation and control the media. i don't mean to suggest there's a dictator in the united states that controls both of those there is a broad class of the wealthy of the court corporations that do a good job of controlling the entities and they don't do it as if they meet late at night with commissions. they don't have to. they have the same motivation, to make a profit and so when you turn on any cable news network
news program other than pbs is corporate sponsored. they can't say anticorporate messages because the corporations are finding their entire program and corporate and owned and the corporations are some of the biggest lobbyists in washington. not necessarily on the finance front but all the issues important to them as media companies with regard to the media concentration, whether they have to pay for free airtime, etc., etc.. so it is a very difficult battle. if you think of the corporations of america being very strong and government being very strong and i think almost an equal for third leg of that triangle is the media, again, very powerful and the individual stock in the middle of the triangle, how do we get out? we could have endless elections on and on and on and which republicans take the side of big business and democrats take the side of big government and nothing changes so we have to break out of this triangle and
the good news is we have the methodology to do it and that i believe is the internet. the internet so far hasn't been taken over bye corporations although they tried three different times and it allows individuals to communicate with each other and organize. the question you have to ask yourself is why have an individual organized today? they have had lots of opportunities. i used to think they were stupid. i used to think they didn't understand the issues and that the media for them. i no longer believe that. i travelled the country. a family is from kentucky. i talk to people all over the country. my good friend in kentucky has a tenth grade education and can explain this better than i did. beano big business is ripping them off and credit cards are ripping them off and banks are ripping them off and the governments are ripping them off. i think they are at this stage of asking themselves what can we do.
how >> we have another question here. >> you mentioned in your book the biggest lies on wall street, i'm curious for you out of the 86 biggest lies what is the biggest and why do you feel so? >> it's so funny because you try to anticipate questions you will get and on fortunately i never anticipated that question, and it's not the way that i wrote the book. i didn't write the book with number one, the law being the most offensive. the way i wrote the book is the first two chapters tied to explain the current crisis and lie is that got us into the crisis. the second tries to identify what is preventing us from getting out of the crisis and then i take a big broad view of general lies on wall street that prevent cost from doing what we want to do which is invest to make money so i look at the stock investing law as and lies about alternative investments so
i don't have any one favor. i will tell you about life 21 because it is a big one and that is by versification has been held up by moderate finance the area and all of wall street as the reason why and how you ought to invest our assets are valued, how risk is value. it's the foundation of the model and the foundation of all modern finance. i think it's wrong. i think it's wrong. i don't think you end up saving money by diversifying and i will tell you why. a german pension fund who tries to diversify in germany ends up holding three or 5% of his assets in california mortgages. he's never been to california. he's never read the mortgage. after the crash he tried to find the mortgage and nobody has it. the investment bank doesn't have it. the judge for the case is you don't have a lien if you can't find the security. so, what happened was this
german pension fund thought he could hold 3% of 33 assets around the world and be protected. these assets were much more correlated and he thought they were and he didn't know whether he paid a fair price because he never had time to do the analysis. he depended on middlemen who were conflicted to decide the price pay and finally if you wonder why maybe american and businesses and other businesses are on the world are not so tightly managed as you what they would be it's because the shareholders are like the german pension fund manager. they each have hundreds of investments of around the world and they don't have the time to monitor them so this theory of diversification sets up beautifully from middleman to come in and told the current pension fund manager what's best for him except they don't, they'd say what's best for themselves and their own cash flows so it turns quickly and to a corrupt system.
yes? >> we have seen major reductions in the stock market, it's down 30, 40%. 300% declines. a lot of bonds deteriorated in value. these people came up with subprime mortgages and obviously if you have a mortgage with 3% backing up and 4% backing you have a slight change in the value of the property and you are under the water quickly. the first question is do you think the market has reached a level that the asset values are attractive and why? >> this is a funny time to be getting the stock because we are in the middle of a supposed recovery and it is a funny recovery. citibank stock went from 57 to one and it's back up to 2.5 or 3%.
but it is true in the last three months the stock market had rallied some 25%. they're still considerably off 40%. but i don't believe it is sustainable and i will tell you why. there was something like $60 trillion of guelph in the world between homes and office buildings and the stock market values of companies. and that decrease to $30 trillion over the last three years. there was about 65 trillion of debt and the united states and that hasn't declined hardly at all. the banks have written off petroleum i sure there's been other write-offs. and so when you have is this on sustainable world where the assets true value, the market has dropped by half and you have a huge debt overhang and how does that overhang get taken care of either banks have to continue to write down losses
which is bad for the system which is bad for the economy or people have to struggle and with much less income and higher unemployment and lower acid from the use continue to pay the debt off and the debt overhang will cripple them for years to come. on the housing site it is true the house and is adjusted just about the percentages i predicted in a book that i wrote in 2006 called the end of the housing bubble. i predicted santa barbara, san francisco and the los angeles would come down some 30 to 50% and the country as a whole would come down 25% and there are towns in california off 55, 60% so there is a chance certain towns are starting to reach but not all of them are and the reason is these banks used to land about seven, nine, ten times the amount of both spouses
to buy a home and realize that is a mistake and they are going back to lending 3.5 to 5% of your combined income. unless you want to put a very substantial downpayment, it's hard for the bank credit evaporation to support the types of housing prices we have seen. and it's funny. the poor neighborhoods and each of the city's or the middle class neighborhoods, they are the ones that adjusted the quickest because they have the most for closure. middle-income people don't have other assets. they don't have other income when the bank comes calling to foreclose their mortgage. but the wealthier areas, areas around the coast of san francisco, san diego and los angeles have adjusted maybe 20% declines but haven't seen their full decline because they haven't had this for closure. but it doesn't mean they won't adjust. they had the largest appreciation, the neighborhoods had the biggest percentage increase. they saw 500% appreciation the last 15 years, so the