The link below carries the comments of one of the many irresponsible and reckless apologists of the laissiez-faire and orthodox free-market ideas that go by the fashionable name of libertarianism
Below is my response to the cavalier claims and remarks of the author above:
While the author of this post claims to be one with the views and sentiments of Chris Hedges, his subsequent 'reasoning' gives it all away.
Look at this statement " 80% of the cause of the problem was NOT because of whiz-bang financial engineering and mirror and smoke"
This kind of statement is fraught with extreme economic ignorance of how financialization ( conversion of a commodity into a financial product) operates. If the result is round one of financial/economic collapse with the post-Lehman Bros. credit freeze, one of the prominent causes of that was surely the mammoth growth and spread of 'Financial Innovation' in the form of derivatives like options, swaps and futures. What these instruments do is extremely over-leverage underlying assets such as stocks, bonds, houses, currency, interest rates etc and transforming them into complex bets in the name of hedging, risk dispersion and liquidity provision.
In the financial world it is accepted that leverage works as a double-edged sword, which is why any risk management principle would always insist on safeguards like margin, transparency and disclosure of price discovery.
According to economic historian Justin fox, the size of this market is around 450 Trillion $, which is also an underestimate if we go by BIS sources who estimate it to be upwards of 600 T $. This is many times the Global GDP itself.
Many monetary claims (like swap fees and CDS premiuims) are based on this extravagant figure, which has very little basis on actual asset size and value. That itself is a big global level financial risk. This behemoth of a market violates all the principles of margin adequacy, transparency and proper disclosure of price discovery which should be bedrock of any risk management system.
Claims on this kind of fuzzy figures have triggered defaults causing sales of actual underlying assets at throwaway prices. Actual $ of subprime loan has been levered 20 time or more on the derivatives market. If an underlying risky asset like a subprime was not levered 20 times or more, systemwide run on credit claims would not have happened on this scale. And Lehman Bros was levered more than 30:1
This monster of a derivatives market has primarily originated from USA whose Central Bank (Fed reserve) is very unlike other Central Banks of the World. It has a mandate to sub serve certain governmental policies on inflation and employment, but is neither owned nor managed by that government. It is owned by private banks and in real sense always serves the interest of private banking in USA.
To consider the Federal Reserve as a part of US Govt is itself a very big fallacy.
The author in one of his subsequent statements show this typical ignorance by considering the Fed reserve as an arm/agent of the government.
His next statement "but the role of the US government in forcing banks to lend to subprime borrowers and the Fed’s insistence on keeping rates so low that it became super-profitable to lend to virtually anyone. is even worse
If the author is really implying that US government forced subprime lending, it is very bizzare and outrageous, though he is not the first to make these kind of claims. First of all in a system like US it is not possible to force any banking institution to lend to a special category of customers. It is not like agricultural lending and loan melas by Indian national banks in the pre-1991 reform era. Such a thing cannot be done in US if a legislation does not mandate it. Also these subprime loans were rated as AAA by rating agencies who are not surely controlled by the US Govt. In fact govt SE's like Fannie Mae and Freddie Mac hid behind these ratings to revel in the subprime party.
The next contradiction is that if low interest rates makes it possible to be super profitable to lend to anybody, why lend mainly/mostly to subprime which are the riskiest borrowers. It could very have been lent to many other borrower types.
Risk management and money management is the responsibility of the lender, which cannot be transferred to the Govt or central bank.
Lowering of interest rates has manifold objectives which any student of monetary policy would appreciate. Lowering of interest rates is not a 'carte blanche' or licence to engage in irresponsible and risky lending. Blaming interest rate policy for very poor lending standards is a very backwards form of reasoning. Just because some political speeches were made by either Clinton or Bush about housing being at the center of the 'American Dream' cannot be construed as a signal to Banks to go ahead and make undocumented loans and then repackage them and onward sell them as gilt-edged Mortgage-backed securities (MBS).
Even more dangerous is the author's tendency to absolve private sector and banks of any accountability by laying all blame on the government . The government in fact was honoring the conventional wisdom of the last 30 years that market knows best and and that deregulation is the best regulation. If US and the west were not tending progressively towards deregulation, derivatives market would never have grown to its current size.
Another unfortunate and reckless statement of the author is "Btw, Obama appeared to be a total nut bar (nut case?) when he alleged that “abusive practices got us here in the first place”. Well, these were the GOVERNMENT’S OWN ABUSIVE POLICIES"
The abusive practices that Obama is referring can be clearly documented for the Credit Card industry for example. The author does not specify what the Government's abusive policies are. It is not clear what is the connotation of the word 'ABUSIVE' for the author. If lowering of interest rates and keeping it there for 1 1/2 years is abusive, he is curiously silent on the effects when over the same period of 1 1/2 to 2 years the Fed Reserve took the interest rate up from 1% to 5.75 %. If keeping rates low were bad, why is the raising of interest rates not good. Also while free market devotees are all fired up over the Fed Interest rate policy, why are those same people quiet about the interest rate or yield on the 10 Year Treasury bond, which is not set by the Fed Reserve. It is today at 2% and market determined and beyond the control of Fed reserve and it is not very much above the Fed rate of 0.25%.
It is really unfortunate that in the eagerness to prove a point about one's ideology and make dramatic opinions that a very casual and careless attitude is displayed towards serious topics of economic systems, policies and issues.
Making brazen misstatements and claims like this just to indulge one propensity for intellectual witch hunting lowers the quality and dignity of discourse on economic issues
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