Mitt Romney and the Next Financial Crisis

An extensive evaluation of the causes of the financial collapse of 2008
has been made available, free, from the Group of 30 (group30.org).
The Group of 30 is a  non-profit, international body of very senior
members of the private and public sectors and academia. Its aims are
to deepen understanding of international financial and economic
issues, to explore international repercussions of decisions taken in
the public and private sectors,and to examine the choices available
to market practitioners and policymakers.

This report, The 2008 Financial Crisis and It's Aftermath;
Addressing the Next Debt Challenge is not likely to be
referenced by US  political parties because it does not support the
simplified and biased economic sound bytes uttered by political
candidates seeking office. The first sentence of the abstract of the
report summarizes the causes of the 2008 crisis as “too much
leverage on the part of all economic participants including
individuals, financial institutions, other private businesses and
governments.” In other words, everyone, at all levels of the
economy, were borrowing too much money from others to fund a variety
of high risk investments that all collapsed like a cascade of
dominoes.

The report begins with a discussion of the causes of the the financial
meltdown anchored to poor decisions by government, private companies
and individuals that accumulated over the period from 2000 to 2008.
These included artificially low interest rates set by the Federal
Reserve that pushed investors toward riskier investments, Congress'
decision to exempt over-the-counter derivative securities from
regulation in 2000, bank offerings of sub-prime mortgages with
balloon payments to house buyers, dramatic growth in aggregate
household indebtedness, availability of easy credit at all levels of
the economy, an out-of-control credit default swap market, lack of
regulation on bank capitalization safety levels, sloppy underwriting
of securities and lack of securities regulation,  and failure of the
Bush administration to take massive action against financial collapse
during the period March to September 2008 “marked by a
laissez-faire-driven fear of too much government”.

Some supporting facts of interest are;

US household leverage increased from 96% to 128% of disposable income
from 2000 to 2008 caused by easy credit, excess personal spending and
extraction of equity from homes through refinancing and home equity
loans. Most of this occurred in middle class households faced with
stagnant incomes and increasing costs over the period.

Overeager lenders and government officials made home mortgage borrowing
artificially easy and initially affordable. Lenders offered sub-prime
mortgages to many homeowners who they knew could not afford them.

Congress' decision to exempt over-the-counter derivatives from regulation in
2000 “was a key turning point in the march toward the financial
crisis.” OTC derivatives rapidly spiraled to $673 trillion
amplifying the losses of the housing bubble.”

Credit rating agencies assigned coveted AAA ratings to risky bundled
sub-prime mortgage securities. Moody's rated 45,000 of these
securities AAA. (AAA ratings are defined to have a 1 in 10000 risk of
default)

Corporate over-leveraging increased dramatically in the years before the
financial crisis. Corporations also used a significant portion of
their indebtedness for unproductive purposes such as stock buy-backs
and leveraged buyouts.

This section of the report concluded that, although largely unpopular with
the public, monetary easing by the Federal Reserve and large stimulus
activities by the Bush and Obama administrations prevented a collapse
of the global financial system followed by a severe economic
depression. It stated that the Great Depression, started by the
financial collapse of 1929, had a smaller potential for destruction
because the leveraging of investments and runs on banks were
predominately performed by individuals. In the 2008 collapse, the
over-leveraging was occurring at all levels of the economy, and the
runs on banks were being performed by institutions rather than small
depositors.

So much for the benevolent Guiding Hand envisioned by Adam Smith on financial
markets.

I see ironic news in the conclusions of this report. The Republican
candidate crowned by the US media as the presumptive winner of his
party's nomination for the office of President is a former leveraged
buyout king of Wall Street based on his tenure at Bain Capital. It is
doubtful that Mitt Romney, if elected President, will do anything to
eliminate the causes of over-leveraging that will lead us to the next
big financial crisis.