The Big Lie of 2011 and Why It Is Important

The bankers and their allied Wall Street Warriors would very much like to have us believe that “The Problem” which spawned the Mortgage Meltdown Credit Crunch Great Recession was caused by “Government Housing Policy, Fannie Mae, and Freddie Mac.”

There is no small amount of self-serving utility in this line of argument, even if there is precious little actual evidence that this is the reason for the crash.  This territory has been covered extensively in this blog, but because of the serious ramifications inherent in adopting  The Big Lie, we ought to review.

The argument is patently false.  The extension of credit to the un-creditworthy was not the product of government housing policy, it was a perversion of it.  Wall Street discovered a taste for the fees associated with collecting mortgages — the more the merrier — parking them in “special investment vehicles” (read: off shore warehouse accounts), then slicing/dicing them into securitized assets (bonds) with various “levels” of risk. If government policy encouraged home ownership, a lá Iron Lady Margaret Thatcher’s Ownership Society, so much the better, this gave an excuse for  selling mortgages by the ton, rather than exercising any judgment about to whom the mortgages were being sold.   No one, no government agency, no government sponsored entity, no government bureau forced the banks to solicit  sales among the unworthy.

The community reinvestment banking rules simply say that a bank must make its products available to all people from whom it takes in deposits, the rules do NOT require the bank to create subprime loans, Alt-A loans, No Doc loans, or any other creative means to sell its mortgages.   We shouldn’t take this to mean that Fannie and Freddie were without blame, after all, when it became obvious they were losing market share in the secondary mortgage market the Mortgage Twins played the game with equally disastrous results as their totally private sector cohorts.

The argument is patently self-serving.  In case we’ve not noticed, the banking sector is doing rather well, Wall Street is raking in the money — even as Main Street continues to struggle.  If the Wall Street Warriors can succeed in removing all blame from the bankers then they will be able to argue against any regulation of their banking operations.  “It wasn’t OUR fault,” they cry, “therefore, we need no new regulations concerning our unmonitored use of Credit Default Swaps, no oversight of our Collateralized Debt Obligations and their origins, no consumer protection bureau in the Fed to enforce rules regarding the transparency and honesty of the financial products being sold to the general public.”

The argument is patently insulting.  The bankers, having secured tax-payer relief in the form of the Troubled Asset Relief Program/ Capital Purchase Program, would like to say, “Thank you very much, now we’ll go back to business as usual — our usual.”  While the $66 billion spent on the TARP program (CBO pdf) was a fraction of the proposed $700 billion number that has stuck in everyone’s mind, it was still a major expenditure, and it should be added to the cost of such things as the “Jamie Deal” in which JPMorganChase acquired Bear Stearns for $10 per share.  [Reuters]

The Big Lie is tantamount to arguing that the taxpayers, having bailed out the banks and guaranteed the survival of our financial sector, should smile politely and be pleased that those self-same bankers are now “job creators” and must not be inconvenienced by “onerous regulations” or any other form of regulation to insure that their misbehaviors of the past aren’t repeated in the near future.

At least Bank of America should have figured out that a bit of regulation would have gone a long way toward enhancing their bottom line.  After adding in all the settlements related to its take over of Countrywide for $4.1 billion, the bank has paid out $37,858,000,000 to date.  [BusinessInsider]

It would be far more honest to say that the “uncertainty” about which the bankers are currently moaning has less to do with the creation and implementation of rules regarding credit default swap transactions, or mortgage term transparency, and much more to do with the continuing problem of how much capital is needed in reserve to cover the costs associated with the remaining toxic assets still in the financial system.

Backward! March!  The banking lobby is fighting the implementation of the Dodd Frank Act with every tactic available.  They are fighting the funding for the Consumer Financial Protection Bureau, the appointment of a director for the CFPB, indeed the entire rationale for the CFPB.  They are fighting the efforts of the Commodity Futures Trading Commission to oversee the credit default swap transactions.  They are fighting efforts to monitor the over the counter trading of derivatives.  They are fighting against having oversight of their capacity to create systemic risk.  They are fighting any proposal for an “Orderly Liquidation Authority,” i.e. a plan to wind down bankrupt banks.

It would be very helpful for the bankers to have us believe that WE are the problem, to believe that WE bought too many homes, that OUR government is at fault, and NOT that THEY engaged in financial manipulations which created the need for consumer protection, for regulating over the counter derivatives, for monitoring systemic risk, and for creating a process for the orderly liquidation of banks on the verge of collapse.

If we give the Big Lie credibility, then WE will be authors of our next Mortgage Meltdown, Credit Crunch, and Great Recession.  When we had the tools (Dodd Frank Act) to reduce the risk to our financial system, we gave into the ideological dog whistles, cat calls, and siren songs of the financialists who promoted the false, self-serving, and insulting Big Lie.


Several references have been mentioned in previous posts as very helpful toward understanding what happened during the period of bank deregulation and in the collapse of the financial sector in 2008.  This list includes Yves Smith, “Econned,” Palgrave-Macmillan, 2010; Michael Lewis, “The Big Short,” Norton, 2010; Roger Lowenstein, “The End of Wall Street,” Penguin Press, 2010; and Scott Patterson, “The Quants,” Crown Business, 2010.  To this list should be added:

Eisinger and Bernstein, “The Wall Street Money Machine,” Pro Publica, 2011; Greg Farrell, “The Crash of the Titans,” Crown Business, 2010;  Suzanne McGee, “Chasing Goldman Sachs,” Crown Business, 2010;  Bethany McLean and Joe Nocera, “All The Devils Are Here,” Penguin Press, 2010; Andrew Ross Sorkin, “Too Big To Fail,” Penguin Books, 2009; Vicky Ward, “The Devil’s Casino,”  Wiley & Sons, 2010.

See also: Joe Nocera, “The Big Lie,” New York Times, December 23, 2011.  Joe Nocera, “Banking’s Moment of Truth,” New York Times, June 20, 2011.  Joe Nocera, “Sheila Bair’s Bank Shot,” New York Times, July 9, 2011.  Nathaniel Popper, “Banks Step Up Spending on Lobbying,” Los Angeles Times, February 16, 2010.  Bullock & Makan, “Wall Street Gears Up For Regulatory Fight,” Financial Times, December 22, 2011.

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