The Financial Crisis of 2008 was a Hoax

Update: 3/30/13 – Wow, this article was written a long time ago, but political and economic shifts tend to play out over decades, so from that perspective, it’s not that old. Anyway, this story came across my Facebook newsfeed today. And I thought it was relevant, to this, one of my first blog posts, New Study Confirms Economy was Destroyed by Democratic Policies by Examiner.com.hoax-1

If Congress had not required through law that Freddie Mac and Fannie Mae securitize loans to people who did not qualify**, the sub prime crisis, “ground-zero” of the whole thing, would have never begun. But even so, Sub Prime was only 1% of the mortgage market. It was not big enough to cause an entire Financial meltdown. What caused this brush fire to spread into a full blown conflagration of epic proportions was a simple but profoundly stupid regulation written in 1992 called the “Mark to Market” rule. Simply put, over the last 6 months banks and other financial institutions have had to write down enormous amounts of assets to below par, even when those assets are being held to maturity, and still performing. What determines the “market price”? Buyers of course. But since the loans, the assets have been packaged with other financial instruments, including the common and preferred shares of the intitutions themselves, they become mixed together under a dark cloud of “will the Fed, Treasury, or FDIC declare them insolvent and wipe out their shareholder equity overnite?” What buyer will step into that market? And so since there is no “buyer” for the securities, the “market price” of the assets becomes determined to be pennies on the dollar. Enter “Mark to Market,” a standard that has no basis in FASB or GAAP accounting. In GAAP accounting a profit or loss on an asset is only taken when a transaction takes place. No transactions have taken place because the market is frozen with fear. Even if there was a “fair” market value placed on these assets, the banks would not necessarily be willing to sell them. It’s their business to hold them to maturity and to make interest as an income. That’s how banks make money.

So it merely becomes a vicious cycle: Regulatory agencies force financial institutions to mark down assets that can’t be sold because of the fear driven into the potential buyer by the cloud of the Regulatory agencies themselves.

There is no financial crisis. There was no lack of regulation. What we have is a regulatory crisis. The source of this problem which is ruining and has the potential to ruin the lives of millions, is the government itself.

Why was was this financial crisis a hoax? Because the establishment knows how to take advantage of the wild swings. You know the old say, “Buy when there’s blood in the streets”? Creating “blood in the streets” is an opportunity for them, at the expense of the people. What can we do about it? Become educated, let our voices be heard, register to vote, and support representatives who represent the people and not “special interests” who are the agents of the Establishment.

(*Update 2-22-09) – I’ve noticed today that many analysts are confirming part of my theory. Santelli, Mike Holland, David Malpass, among others have said repeatedly today that private investors who were for a while buying these ‘toxic’ assets at 27-30 cents on the dollar, pulled back when the shadow of the Government stepped in.

 

 

**The Community Reinvestment Act

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3 thoughts on “The Financial Crisis of 2008 was a Hoax

  1. Stephen Pickering Post author

    I’m listening to Bernanke in the background testifying in the Senate. None of this would be happening without the Mark to Market rule. None of it. 8% of mortgages have defaulted. Mark to Market has caused 100% of them to marked down creating billions of false, paper losses, and a false lowering of assets, which brings in the regulators applying Capital Requirement Rules, which legally keeps the banks from lending. This freeze has been and continues to be created soley by the Federal Government. Pete Townshend is right. We do live on an immanence front, and it is purely a put on.

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  2. Stephen Pickering Post author

    Hey Jason,
    I appreciate you taking the time to read this and comment. But these financial institutions weren’t losing money operationally. All those billions were indeed paper losses, not real losses. Then the government comes in and says, “Oh you’ve got to write all this down by this much and that means you’ve got to raise 10 billion in Capital. Oh you can’t? O.K. some of you are insolvent, goodbye common shareholder!. Or we’ll give you a loan, but we now own you, such as in the Fed now owning 80% of AIG.
    If it were a fair market, a true free market, not clouded by the hand of the regulators, I might agree, but even then no profit or loss should show up on the income statement until a transaction is made. These companies were cash flow positive. They didn’t need to sell anything to pay their debts. If I own property A and I want 200K for it, but I don’t need to sell it, and you offer me 100K, and neither of us will budge, what’s the market value?
    If the housing market got to be a bubble during the 02-07 expansion, also I’m assuming that the Mark to Market rule allowed them to book paper profits, extraordinary profits, as extraordinary on the upside as the losses now are on the downside. Do you know if that’s true?
    I agree the Fed is a monopoly and that’s one reason that the currency shouldn’t not float. We have had a monetary crisis in this country since 1971 when Nixon closed the London gold window, and that is at the heart of this problem as well. And that’s what I am trying to say. We have a regulatory problem, not a Capitalism problem or a lack of regulation. If the Government went in, right now today and made the phone companies write down the true value of their plant and equipment, all that legacy copper, AT&T and Verizon would be History. Thanks for the link. That information looks invaluable to me. I really appreciate it.

    -Stephen

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  3. Jason Gordon

    The current situation is correctly understood to be the product of an unprecedented expansion of credit — i.e., debt — due to the Federal Reserve’s monopoly control of interest rates. (ABCT)

    All the crumbling leveraged investing and mortgaged asset arbitrage are merely a symptom, though I agree with your assessment of the complications standing in the way of a market clearing correction.

    The painful truth is that if there is no money available or willing to purchase what you term “assets” they are nothing of the sort. They are worthless paper. Value is demand driven, and debt based demand demands appreciation — which explains the old fashioned ‘sane’ thinking that only capital goods should be debt financed.

    This link has a great graphic illustrating the total economy’s dependance on inordinate and unsustainable debt levels as a percentage of GDP.

    http://www.chrismartenson.com/blog/crisis-explained-one-chart-debt-gdp/11570

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