Dr. Ioannis N. Kallianiotis

Economics/Finance Department

The <-xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Arthur J. Kania School of Management

University of Scranton

Scranton, PA  18510-4602


Tel. (570) 941-7577

Fax (570) 941-4825


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Woodrow Wilson

President of the United States (1913-1921)












June 2011

Globalization and Deregulation of the Financial Markets:

The Latest Crisis





The purpose of this work is to determine the elements that caused the latest “planned” financial crisis and the prospective problems to the U.S. and consequently to all economies of the world, due to the inhumane globalization. The global uncertainty has increased the price of gold and the U.S. debts and deficits have caused the depreciation of the dollar, which with the help of speculators have heightened the price of oil and created a number of bubbles. The deregulation in the U.S. financial markets and institutions and the easy money policy had increased lending, corruption, speculation, prices in financial and real assets (even in food) and had caused these enormous bubbles, which some people (the world planners=“the wise men”) burst them in 2008 and created the worst financial crisis, following by the first most severe recession (depression) in the 21st century. This moral and political crisis, in the western free-market economies, led them (especially Euro-zone) into the recent and continued deep recessions, enormous unemployment, annihilation of their wealth, complete distrust for the financial markets and governments; some nations are closed to bankruptcies and have lost their sovereignty, some individuals and families have been destroyed, and a new cold war appeared. Hence, we face, today, an absolutely uncertain future with these interdependent nations that the world leaders accepted without any resistance. This hateful globalization made a domestic financial crisis international.



I. Introduction


The events of the last couple of years and the current ones, which could destroy the international economic system, have proved the magnitude of the problem that globalization[1] has caused to all nations and especially to the U.S. economy, that is the victim and the sacrificer (with all these stranger people, who advise and decide about the future of the world) of the domestic economic welfare for the creation of a “global welfare”. It is very easy to fool some people, but Americans can be fooled all at once by a few manipulators of the truth and the objective in life. The world, currently, has found itself in the midst of the largest global financial crisis since the Great Depression of the 1930s, and this crisis has underlined the importance, that nations must be independent, self-sufficient, and in an autarky situation; following their own business cycle, their own value system, their own socio-economic structure, their own public policies, and being respectful even by their enemies. This is where we must stead today, after all these thousands of years of growth, civilization, knowledge, and above all, the revelation. The rest have no real value, only a market value, which actually is a bubble (a big lie).

Business managers have taken advantage of the phenomenon of globalization by exploiting factors of production, maximizing their compensations, increasing their power over the political leaders and the other authorities, and magnifying the uncertainty around the world. They are stretching the fingers of the “invisible hand” of our free-market system into every country. Socialist countries, atheist communist countries, under-developing ones, all have been persuaded that the market knows best. They embraced the system and joined the game, but we are not sure if they have learnt something from its current deficiencies. Managers by outsourcing their operations reduced their labor and material costs and increase their compensations, earnings, revenue, and shareholders return. The old economic theories and models can not apply to this unreal world, the “new world [dis]order”.  If we do not bring back the social welfare that countries were experienced, before these uncontrolled liberalizations, deregulations, and innovations; of course, with some interdependence, fair competition, and ethical cooperation among nations, even protectionism if it is needed for the citizens’ well-being, this global crisis is nothing compared with the next one.



II. American Devaluation and the Globalization of the Crisis


When the latest crisis began in the U.S. investment banking industry,[2] there was some hope that the continued strong growth in the emerging giants (China, India, and Brazil) might be able to sustain global growth, as the more advanced economies slipped into recession, but the growth in emerging markets depends on their ability to sell to the richer countries. Unfortunately, globalization has made the ups and downs of economic activity (business cycles) very synchronized[3] and at the same time, diversification has become worthless. A country cannot become a net user of all commodities, but a producer and partially user and exporter of the excess production abroad.[4] Some people emphasize that globalization has reduced inflation,[5] but inflation depends on domestic public policies and institutions and not so much on the openness of a country. The only thing that we are sure is that globalization has caused tremendous unemployment and has encouraged illegal migration, which has contributed to the imported unemployment, has reduced wages in the host countries,[6] and has destroy the national identities of the host nations.

    The structure of our free-market economy is very complex and there are participants, who have superior knowledge, information, power, and other advantages above the average person and unfortunately, they abuse their power, acting against the less powerful and against the general public, and against the social interest. The market system is providing to them its structure, all these resources, capital, labor, land, institutions, instruments, and hundred of millions of dollars salary and other benefits (for the CEOs). Businesses and their executives have to give back a “reward to society” for the benefits that they have derived from this free-market.[7] Then, this free-market benefits only businesses and is acting against the social interest; for this reason, it needs to be regulated. The financial markets and institutions are collecting the savings and use them to finance the country’s economy by creating jobs, income (wealth), and improve social welfare. By allocating the savings (domestic and foreign) to businesses and individuals and monitoring the use of these funds, the markets and their institutions play a very important role in the entire free-market system. Parts of the financial sector are unregulated today, due to an irrational deregulation that started in 1980 and continued up to the current crisis, three years ago (2008). Competition has been lost in this market, hostile takeovers are its trend and its pride, and expropriation and foreclosures are its most common functions, lately.    

            The economics of financial deregulations have been studied, but the assumptions of those researchers were unrealistic and heroic. Their results appeared to be wrong and opposite of what they were expected and recommended to the decision makers. Their analysis was a positive one and a “politically correct” one. Regulations and financial markets, and of course, the entire political economy of a country must be analyzed with the traditional normative analysis: What are the “optimal” regulations that will improve social welfare, stability, growth, employment, and democracy in our country- The government, the central bank (Fed) and the other regulatory agencies have to be involved in our financial system because the economy depends on this system. To improve an economy, we need a normative political-economy approach, where every one must be responsible for his role and his obligations towards the society. We did not come here to steal, loot, lie, bribe, pollute, waste, abuse, etc. without using our mind, our conscience, our inherited values and virtues, and without maximizing our objective utility function, which is to maximize our efforts to reach perfection. Then, because we do not know our ultimate objective, someone has to direct us and these are the laws, regulations, codes of ethics, social justice, traditional value system, and other ones imposed by governments (uncorrupted moral and ethical democracies), by educational system (value oriented education), by institutions, and by families.    

A reasonable question is: Why there have been so many deregulatory reforms in banking and financial services during the past 30 years- Kroszner (2000) is using five different approaches (“public interest”, “private interest”, “ideology”, “institutions”, and “leviathan”) to explain regulation and deregulation in financial institutions. Of course, the objective of every science is the improvement of social welfare (well-being) of the citizens (public interest) and nothing else. Then, regulations are necessary in banking and other financial firms to correct any market failures and protect uninformed or uneducated or entrusted consumers from harm. Public interest must be satisfied by regulating the free-market.[8] The private interest is deregulation, increasing their size, strength, and wealth, so they can avoid the coercive power of the government and capturing rents for themselves at the expense of the general public. These institutions become sufficiently powerful, so much as to influence the politicians and the regulatory bureaucracy, which serve at the end primarily, the interest of those subject to regulation. The supposed regulated market actually captures the regulators.[9]  

            The effectiveness of the interest groups depends on their lobbying power. Businesses and producers of goods and services are more powerful and better organized than consumers, so regulations will benefit producers more than consumers.[10] For example, in the long legislative debates over the expansion of bank powers, banks, securities firms, and insurance companies organized powerful lobbying organizations to reduce regulations and they succeeded. Also, politicians are concerned about finding an optimal support coalition to promote their reelection chances, so they take into account the marginal costs and benefits to different groups. This explains why the banking and financial system had particular influence on politicians.  Credit allocation through financial institutions can be an important implicit or explicit tool satisfying government’s industrial policy (redistribution of resources). For this reason, they must be compensated through protective regulation (deregulation). People working for the free-market (Wall Street and Banking) are very smart and it is easy for them to find loop holes bidding the regulations (“brain spread”). Actually, the government has little incentive to enforce rules of sound financial institutions.[11] The codependence of the financial markets on the government and of the politicians on the Wall Street, will continue to allow problems to grow unchecked, as it happened during the latest financial crisis. Then, governments will never avoid bailouts of the corrupted financial sector because of deregulation and their fears that the Main Street will be negatively affected by the financial market absurdity (seeking an unethical balance between lobbyists and voters).

            It has been impossible for the average person to explain the widespread economic deregulation that has taken place during the past three decades and to understand the ideology of these people who act against the social interest. Their ideology might come from some kind of value-neutral political philosophy (liberalism, modernism, “new ageism”, globalism, etc.) and their enemy is the value-oriented government (conservatism, traditionalism, patriotism, spiritualism, etc.). With their ideology, they created an anti-humane legislative, cultural, educational, and social structure of excessive concentration of power in the hands of the financial elite (actually, they are people of the same origin, background, and beliefs) and no one can oppose their cruel establishment.[12] What constitutes ideology and why it acts against the social interest is something that has to do with their wrong philosophy in life; they ignore the ultimate objective of creation and the true aim of human beings.

            Of course, moderation, efficiency, morality, and honesty must be the objective of politicians and bureaucrats, who are public servants. But, unfortunately, they try to increase their size and influence (the leviathan syndrome). The fiscal demands (government expenditures and budget deficits) of the government help financial institutions to develop close and in their favor relationships with politicians who became the supporters of deregulations. Federal Reserve System (main regulator of bank holding companies) and the Treasury (through the Office of the Comptroller of the Currency regulates the national banks) wish to be the main supervisors of financial institutions with expanded powers. Then, there is a conflict between regulators over which one would be the dominant regulator in the future and they decided, instead of giving the power to the government, neither one of them to dominate.         

To understand why there has been so much recent deregulation (regulatory reforms)[13] in financial institutions is difficult, if we would not consider the ultimate objective of the “world planners”.[14] But, it is necessary to identify some of the factors that have contributed to these political-economic innovations[15] and their unanticipated social losses and threat towards their own existence. The deregulations have caused serious economic shocks that altered the efficiency, effectiveness, and the effluence of financial sector on the real one. Technological changes had significant distributional consequences, new products and markets brought new constituencies, competition among institutions increased, and innovations affected the preexisting markets and institutions and caused shifts to risks from financial institutions to governments (to taxpayer individuals). Securitization of mortgages, loans, and consumer credit had become commonplace. Commercial paper and junk bonds provided competitive alternatives to traditional investments. Foreign banks and financial firms entered and were doing business in every country. Banks were starting selling insurance, too. The evolution of asset price bubbles, the trading and pricing of derivatives (redistribution of risk or zero-sum gain instruments),[16] the impact of agency problems on the management of financial firms, the greed, the short-term thinking, the poor judgments of practitioners, and the participants self-interest created a very unstable financial system, which unfortunately, became global and this local crises spread to all over the world.[17]  With all these philosophical, technological, economic, and legal changes, the old financial–real sector equilibrium was disturbed and the results are that the taxpayers have to bail them out. Economists had ignored the negative effects of deregulations and they were emphasizing issues on efficiency. The question is the same all over the world: How to maximize social welfare in a country, without making a single individual worse-off-[18]

            The financial services industry has experienced tremendous demands, greedy supplies, and significant changes over the last thirty years. Thousands of banks have been consolidated, privatized, restructured, newly formed, diversified internationally, introduced new products, but in addition, have been deregulated and extremely risky. Consolidation accelerated, following the 1980s deregulation of restrictions that prohibited bank expansion across geographic markets and into other financial services. The recent destructive deregulation was the Gramm-Leach-Bliley Act (November 15, 1999), which loosens restrictions on commercial banks, investment banks, retail brokerages, and insurance companies; they are all free to enter each other’s lines of business.[19] Have these deregulations improved the risk-return trade-off faced by financial firms- Have they improved the social welfare-

            As a result of bank failures and rapid Mergers and Acquisitions (M&A) activity, the number of banks and banking organizations fell by more than 34% between 1989 (12,728 banks) and 2008 (8,384 banks).[20] Some 279 banks have collapsed since September 25, 2008, when Washington Mutual became the biggest bank failure on record. The recent recession and collapse of the housing bubble have cut bank-industry employment by 188,000 jobs (8.5%), since 2007, according to FDIC data.[21] The share of total nationwide assets held by the eight largest banking organizations nearly doubled over this period. Sophisticated financial technologies and innovations, such as derivatives contracts, off-balance-sheet guarantees, and risk management might have been produced more efficiently by larger institutions. Thus, deregulation of any restrictions on banks increased their sizes. The demarcation between banks and investment banks (Glass-Steagall Act of 1933) had started loosen since 1956 and 1970 with the Bank Holding Company Act and the Bank Holding Company Act Amendments, which allowed BHCs to underwrite certain eligible securities, including general obligation bonds, U.S. government bonds, and real estate bonds, that were exempted from the original Act. In the mid-1980s, the Fed and the Office of the Comptroller of the Currency (OCC) began loosening restrictions on greater bank participation in investment banking and insurance.[22] 

            There are legitimate worries about the manageability of such complex enterprises that we have created the last ten years. The financial regulatory system had worked remarkably well in maintaining financial stability over the past sixty-five years, but in 1980s deregulation started and the system’s stability started to be threatened. Lately, the financial system collapsed and the government had to rescue it. The conservative think tanks criticized such rescues as the socialization of the financial institutions and an unwarranted government intrusion into the free market. Liberal think tanks criticized such rescues as a misuse of taxpayer money to protect rich bankers and financial speculators. At that moment, we had to rescue these institutions because they affect negatively the real sector of the economy, but we have to regulate them so the society can be sure that similar crisis will not happen soon (the traditional view). As the world (its “planners”) abandons humane social policies and embraces globalization, we will see more crises and worse than the current one. Unemployment is worse than inflation or financial market instability. We have to give priority to other indicators and not to the stock market indexes. A distress index,[23] which will measure unemployment, inflation, and debt, would be better for our society because it will measure social wealth. This wealth is the “safety net” of the citizens and has to be protected by regulating the institutions and prevent them to act inefficiently and unfairly for their suppliers of funds. These regulations have to be extended beyond banking and firms, which received rescue funds to the entire financial sector. The financial conglomerates that we created are too big to fail because they create thousands of unemployed people and destroy the confidence for our financial system by generating a financial panic, an economic turmoil, and a deep recession. We have to be careful after this crisis and not to repeat the mistakes of the last thirty years, but to learn the lessons of the current economic contingency.

Furthermore, credit default swaps (CDSs), which allow banks and other lenders to buy insurance against borrowers going bust, have caused serious problems to the borrowing countries and the financial markets. Europeans are asking for more regulations of these speculative instruments and more transparency, especially lately, with the PIIGS in Euro-zone.[24] Also, the EU was considering a ban on speculative derivative trades, including credit-default swaps, which have been blamed for worsening the crisis in Greece.[25] Unfortunately, Greek stocks and government bonds tumbled on mounting concern the nation might struggle to meet its debt commitments as public finances were deteriorating. Greek government bonds fell the most in a year as Fitch Ratings downgraded the nation’s credit.[26] Moody’s Investors Service slashed Greece’s credit rating to junk status on June 14, 2010 in a new blow to the debt-ridden country that is under international scrutiny after narrowly avoiding default in May 2010.[27]

The U.S. Federal Reserve’s “easy money” policies, during the first part of this decade (the Fed cut its target rate for overnight lending between banks to 1 percent in June 2003 from 6.5 percent in December 2000, and left it unchanged for the next year), caused the housing bubble and a tremendous borrowing by businesses and individuals (banks were offering loans without any exception to everyone).[28] Then, between June 2004 and June 2006, it raised the rate in quarter-point moves to 5.25 percent. In 2007, we started talking about the distressed mortgage market and the tremendous losses to financial institutions.[29] But, this must be expected because a medium house in the U.S. is $200,000 (borrowing money), the mortgage rates about 7%, the property taxes ($6,000),[30] insurance, maintenance, and other costs made this poor individual to pay in 30 years 3 times the purchasing price ($600,000) of this home. When he loses his job, due to our market oriented economy, everything is lost for him and his family. It seems that there is no real ownership in any of the two extreme systems (communism and capitalism). The cost of renting a house is much lower than the cost of owning one.[31] European Union tries to impose a similar system to its country-members because they did not have so far property taxes and insurance on their homes.

The subprime[32] crisis in the U.S. national housing market was the worst in 20 years. The foreclosure wave that began in 2006 was sparked by problems with subprime mortgages. Most subprime mortgages are “hybrid” loans, which have a set interest rate for some initial period, say two years. After the initial period, the interest rate adjusts every six months for the rest of the loan’s term. Most commonly, this rate adjustment is tied to the 6-month LIBOR,[33] and the adjustable rate is usually 6% points above the LIBOR. The initial interest rates on subprime adjustable-rate mortgages (ARMs) were always markedly higher than the interest rates offered on prime mortgages.[34]  The higher interest rates after adjustment in 2004 and 2005 were about 3 to 4 percentage points higher than the initial interest rate. The main problem in the subprime mortgage market is many borrowers’ inherent inability to afford the monthly mortgage payment, not the interest rate tied to the loan. Across the U.S., foreclosure rates on both subprime and prime mortgages had risen, and more foreclosures were expected in the near future, due to high uncertainty in the labor market. Lower market prices increased the probability that a borrower will have negative housing equity (HE), meaning that the outstanding mortgage balance (OMB) is higher than the house’s current market value (HCMV).

Homeowners with negative housing equity do not routinely default on their mortgages. Only when adverse life events at the household level take place and affect negatively cash flows (job loss, divorce, unforeseen medical expenses, etc.), typically presage foreclosures. Default probabilities will rise when homeowners are in a position of negative equity because they will have trouble refinancing a mortgage or selling their houses. The homeowner’s interest is to continue serving his monthly mortgage payment, but the business cycle does not allow him to fulfill this obligation. The majority of subprime borrowers had high Loan-to-Value (LTV) ratios, meaning little equity in the house at the time it was purchased; they did not fully document their assets and income, an omission that could mask other risk characteristics; and they had high debt-to-income ratios, meaning that the mortgage was financially burdensome under the best circumstances. Then, a household-level shock could prove to be a tipping point triggering eventual foreclosure.

Also, securitization (the pooling and packaging of loans into securities for sale to investors) had increased the availability and improved the terms of credit, but had increased risk, too. Rather than holding loans on their balance sheets, financial intermediaries were using the proceeds from securitization (asset-backed securities, ABS) to originate new loans. Securitization grew rapidly for most of this decade, with ABS outstanding rising from $3.4 trillion in first quarter 2000 to $8.4 trillion at their peak in mid-2008. When the housing bubble burst, the value of the collateral backing much of the ABS declined sharply, and so did the value of the securities themselves. The Federal Reserve responded by creating the term asst-backed securities loan facility (TALF).[35] Its purpose was to boost securitization by providing loans to people holding certain highly rated ABS. Also, the Fed turned to a new set of policy tools to provide liquidity and direct funding to borrowers and investors in key credit markets. The result was a variety of new facilities: (1) Term Auction Facility (TAF), (2) Term Securities Lending facility (TSLF), (3) Primary Dealer Credit Facility (PDCF), (4) Asset-Baked Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), (5) Commercial Paper Funding Facility (CPFF), and (6) Money Market Investor Funding Facility (MMIFF).

            Further, there are many arguments against the extreme executive compensations during the last years, but at the same time there are a few, who are in defense of these anti-social abuses of the “free-market” (value-free) system.[36] The defenders say that “the U.S. economy has done extremely well, so the executives must get these compensations”. Of course, corporate profits have grown, but their growth is about the rate of growth of the economy. Then, CEOs have not added any exceptional value to the economy. In 1980, the compensation of the average chief executive officer was forty-two times that of the average worker (<-xml:namespace prefix = v ns = "urn:schemas-microsoft-com:vml" /> ); the peak was in 2000 ( ); in 2004 it became ( );[37] and in 2006 ( ).  In 2007, the total revenue of the 500 largest companies in the U.S. was $10,602 billion; their profit was $645 billion, their profit as a percentage of revenue was 6.09%; the compensation of their CEOs was $5.5 billion (maximum executive compensation was $100.3 million), their 2nd executives received $2.17 billion (maximum $72.5 million), their 3rd executives received $2.08 billion (maximum $71.4 million), their 4th executives were compensated with $1.74 billion (maximum $58.4 million), their 5th executives cost $1.66 billion (maximum $49.1 million). Total pay to top five corporate executives was $13.14 billion, which was 2.04% of the corporate profits.[38]

            The rationale was that these executives had “created wealth” for their shareholders. But, the value that CEOs create ( ) is very small because of their high compensations ( ). Their high risk investments are increasing the risk premium of their institutions and consequently the cost of capital ( ). Then, the wealth to the shareholders is declined and as their net income (earnings after taxes) are falling, they have to raise prices to increase revenue and lay off their workers to reduce labor cost or to misstate their financial statements (inflate the financial results to affect positively their stock prices and to create an incentive to receive higher salaries and bonuses).[39] Since 1940, aggregate corporate profits have, on average, constituted some 6% of our GDP, ranging from lows of about 4% to highs of about 8%, but the CEO compensation went through the roof.[40]

            Actually, who is to blame for the current financial crisis and the peculiar recession that it caused-

  1. Countries who consume beyond their production ( ) and generate negative saving.
  2. The U.S. households who have spent way beyond their means in recent years; they have to start saving and stop being “consumers”.
  3. The banks that took the upside for themselves and left the downside to the taxpayers.
  4. The monetary and fiscal authorities who did not intervene in the markets.
  5. The regulators who extended homeownership to even those who could not afford it.
  6. The theorists who recommend 100% debt.
  7. The tax system, which allows the interest on business debt to be tax deductable.
  8. The market who tolerate high leverage.
  9. The executives who determine their own compensations in hundreds of millions of dollars.
  10. The Congress who has been submitted to lobbyists and deregulated the financial markets.
  11. The weak and immoral political leadership who cares only for its reelection.
  12. The controlled educational system, which has become a value neutral professional schooling.

In March 2010, European politicians and regulators were initiating a continent-wide ban on speculative trading of sovereign credit-default swaps. Making it stick without the Americans could not work. Unfortunately, New York and London dominate swaps trading, and both have resisted greater regulation. Last year, U.S. regulators and Congress rejected a proposed ban on buying credit-default swaps without owning the underlying debt. Adair Turner, chairman of the U.K. Financial Services Authority, said on March 10, 2010 that these so-called naked swaps were not the “key driver” of the Greek debt crisis and it would be wrong to rush to ban them. (sic). The European Union’s top regulatory official, European Commission President Jose Barroso, said on March 9, 2010 that the 27-nation bloc will consider banning “purely speculative naked” credit-default swaps after German Chancellor Angela Merkel and French President Nicolas Sarkozy called for a crackdown on derivatives trading to prevent a rerun of the Greek crisis. [41] European Commission officials are in early stage talks with euro-zone countries about setting up a “European Monetary Fund” to improve economic cooperation in Europe.[42] Also, the U.S. and European governments are moving toward a consensus on taxing large banks to cover the cost of any future bailouts rather than asking taxpayers to foot the bill, as happened in past banking crises.[43]


III. Conclusion


            Lastly, in a newly released transcript of a Federal Reserve Board meeting in March 2004, former Chairman Alan Greenspan argues against disclosing too much to the public lest the Fed “lose control of a process that only we fully understand.” This statement ranks as a sign of monumental arrogance for the controlled super-power. The context of Greenspan’s remark was a discussion over how much to reveal about the Fed’s thinking on monetary policy in general -not on mortgages in particular. But mortgages were part of the Fed’s monetary deliberations. Democrats and Republicans had been squabbling for weeks over how to ensure that bailouts would not happen in the future. Various bills would attempt to tie the government’s hands. The best way to do that is to discourage leverage. In other words, the federal government should make it expensive for banks to assume too much risk (whether on or off the balance sheet). In a perfect world, markets would perform this function. Theoretically, a bank with too much debt would be punished by sharply higher borrowing costs (or by a cessation of credit altogether). But in the just-ended economic cycle, lenders and investment banks were extended cheap credit as if the supply were limitless. In the 1990s and 2000s, “new-age” financial theorists argued that, thanks to modern risk-management tools, the traditional fear of leverage was outmoded. Even the Securities and Exchange Commission bought into this nonsense. In 2004, it chose to lessen capital requirements on investment banks so long as the assets they owned were “liquid.” The upshot- The “liquidity” of their assets, including mortgage bonds, proved to be ephemeral. Their debts proved permanent and crushing. And post-crash, when the International Monetary Fund looked for indicators that predicted which banks would fail, it found, lo and behold, that the “basic leverage ratio” was the most reliable guide to a bank’s survival. To paraphrase a warning from the drug culture, “debt kills.” Fed Chairman Ben S. Bernanke came into office promising more transparency. The Greenspan tapes confirm that Bernanke was on the right path: Openness is better. Finally, the Senate bill would narrow the Fed’s charter, so that it would regulate only big banks. Bad idea. The Fed is too close to Wall Street as it is. At least, as currently structured, it is exposed to all views. In 2004, the Atlanta Fed tried to warn the Federal Open Market Committee of the dangers in mortgages. Too bad they did not listen.[44] Lately, Dominique Strauss-Kahn, after a sexual scandal, resigned as the 10th leader of the International Monetary Fund, kicking off a contest for his successor as Europeans seek to retain the job amid a lack of unity among emerging-market nations.[45]

            The latest financial crisis had its origin (had been generated by the institutions, mostly, investment banks) in the U.S. housing market. And this anticipated financial crisis together with the high debts and prices of energy and food (due to our lack of production and dependency on imports) brought the economy to a deep recession (severe unemployment) and due to globalization; it was spread to the rest of the world (this is another “advantage” of globalization, a domestic problem of a large economy becomes global). The failure of the unregulated large financial institutions increased the systemic [global systematic (markets)] risk and harmed other financial firms and finally, the real sector of the economy.[46]  Another important type of risk to the financial system has been the “counterparty risk”, which is the danger that a party to a financial contract will fail to live up to its obligations. Counterparty risk exists in large part because of asymmetric information. Individuals and firms know more about their own financial conditions and prospects than do other individuals, firms, and investors (i.e., investment banks that deal in complex financial contracts and the nature of risk they face is not obvious). The solution is only one, regulation and control of every institution and business, from domestic to international, for the benefits of the single, ignored up to now, citizen.





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[1] Richard W. Fisher (2008) has defined globalization as, “an ecosystem in which economic potential is no longer defined or contained by political and geographic boundaries; economic activity knows no bounds in a globalized economy; a globalized world is one where goods, services, financial capital, machinery, money, workers and ideas migrate to wherever they are most valued and can work together most efficiently, flexibly and securely”. To paraphrase, actually, to correct this definition, globalization is a virus (disease) of our global socio-economic system, which has been imposed forcefully on every nation and individual and in which socio-economic potentials are no longer defined or contained or controlled by nations, their governments, their public policies, and their domestic objectives; but, activities, laws, ideas, pressure, and exploitation know no bounds in this globalized chaos; in this globalized world, goods, services, financial capital, machinery, money, workers (mostly, illegal), crime, ideas, migrate to wherever they want and without any control to maximize their self-interest and impose their will, acting against the citizens’ social-interest and against the sovereign nations’ objectives.  If this (globalization) is the system that we were dreaming after the fall of communism in 1990 (sub-culture of oppression) and the collapse of capitalism in 2008 (sub-culture of waste), it will be proved very soon that this is the worst nightmare for humanity, actually, its end.          

[2] Investment banks profit from companies and governments by raising money through issuing and selling securities in the capital markets (both equity and bond), as well as providing advice on transactions such as mergers and acquisitions. To perform these services in the United States, an adviser must be a licensed broker-dealer, and is subject to SEC (FINRA) regulation. Until the late 1980s, the United States maintained a separation between investment banking and commercial banks. Other developed countries (including G7 countries) have not maintained this separation historically. A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities. Trading securities for cash or securities (i.e., facilitating transactions, market-making), or the promotion of securities (i.e., underwriting, research, etc.) was referred to as the “sell side”. Dealing with the pension funds, mutual funds, hedge funds, and the investing public who consumed the products and services of the sell-side in order to maximize their return on investment constitutes the “buy side”. Many firms have buy and sell side components. The last two major bulge bracket firms on Wall Street were Goldman Sachs and Morgan Stanley until both banks elected to convert to traditional banking institutions on September 22, 2008, as part of a response to the U.S. financial crisis. Barclays, Citigroup, Credit Suisse, Deutsche Bank, HSBC, JP Morgan Chase, and UBS AG are “universal banks” rather than bulge-bracket investment banks, since they also accept deposits (though not all of them have U.S. branches). Firms considered part of the Bulge Bracket: Commonly, the following banks are widely considered to have Bulge Bracket status: Bank of America, Barclays Capital, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley, and UBS.

Prior to 2007-2008 Subprime Mortgage Crisis. The five American Bulge Bracket firms on Wall Street prior to late 2008 were, from largest to smallest: Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Brothers, and Bear Stearns. This list shrunk to none as a result of the 2008 subprime mortgage crisis, with Bear Stearns being purchased by JP Morgan Chase, Lehman Brothers having filed for bankruptcy, Merrill Lynch being purchased by Bank of America, and Goldman Sachs and Morgan Stanley moving to become banking holding companies.

Banks formerly part of the Bulge Bracket:

  • Bear Stearns, acquired by JPMorgan Chase in March 2008.
  • Dillon, Read & Co., acquired by Swiss Bank Corporation in 1997.
  • First Boston, acquired by Credit Suisse in 1988 and branded Credit Suisse First Boston, later renamed to Credit Suisse.
  • Kuhn, Loeb & Co, merged with Lehman Brothers in 1977, forming Lehman Brothers, Kuhn, Loeb Inc.
  • Lehman Brothers, declared bankrupt in September 2008. The Asian and European operations were bought by Nomura. 
  • Merrill Lynch, acquired by Bank of America in September 2008.
  • Salomon Brothers, acquired by Travelers (eventually Citigroup) in 1998.

On September 15, 2008, Lehman Brothers filed for Chapter 11 bankruptcy protection. The filing marked the largest bankruptcy in U.S. history. The following day, the British bank Barclays announced its agreement to purchase, subject to regulatory approval, Lehman’s North American investment-banking and trading divisions along with its New York headquarters building. On September 20, 2008, a revised version of that agreement was approved by Judge James Peck, but was prohibited by British authorities. On September 22, 2008, Nomura Holdings announced that it had agreed to acquire Lehman Brothers’ franchise in the Asia Pacific region, including Japan, Hong Kong and Australia. The following day, Nomura announced its intention to acquire Lehman Brothers’ investment banking and equities businesses in Europe and the Middle East. The deal became effective on Monday, 13 October, 2008. In 2007, non-U.S. subsidiaries of Lehman Brothers were responsible for over 50% of global revenue produced. Lehman Brothers’ Investment Management business, including Neuberger Berman, was sold to its management on December 3rd, 2008. Creditors of Lehman Brothers Holdings Inc. retain a 49% common equity interest in the firm, now known as Neuberger Investment Management. (

[3] There is a very high correlation ( ) across countries in production (output), but a small correlation in consumption because of the unfair distribution of this product and income that the countries are producing. Enormous exploitation of labor exists in almost every country (except CEOs and government officials). This is an anomaly that Backus, Kehoe, and Kydland (1992 and 1995) have documented.  

[4] Then, , and the country can survive financially.

[5] Evans (2007) found that greater openness should be associated with higher, not lower, inflation.

[6] Illegal migration has destroyed many countries, not because of the unemployment and low wages that has created, but the uncontrolled crime, ghettos, deterioration of education, culture, language, and dilution of domestic civilization and identity of the nation.

[7] See, Kallianiotis (2002, p. 55).

[8] Public interest can be satisfied by regulations, like deposit insurance, sufficient capital, low-risk investment, etc.., which create a sound financial system and avoid spillover effects for the real economy.   

[9] Pressure is exerted directly on politicians through campaign contributions or votes. The politicians, then, pass new statutes or pressure the regulators to act in favor of the interest group. In other cases, regulators were working before for the private sector and after leaving the government, they want to go back to this market, which provides these lucrative employment opportunities and the hundred of million dollars salaries.

[10] See, Stigler (1971). Unfortunately, labor unions and trade organizations are losing power every day and have been unable to develop effective lobbying bodies, lately. On the other hand, the Independent Bankers Association of America has been very effective at organizing and representing the interest of small banks, as Kroszner (2000, p. 26) is saying.

[11] Then, after this crisis, we will forget everything related with regulations, controls, and public interest (taxpayers benefits). We have lost control of this global market (globalization) and no politician can criticize or go against this trend. This is a “new age” virus and people are very weak spiritually to go against this evil movement.

[12] Two examples of shifting ideology towards a pro-market one and against social interest (nations’ interest) are Ronald Reagan in the U.S. and Margaret Thatcher in England in 1980s. Identifying who were the driving forces behind their “new ideology” is not part of this work. Hopefully, the future historians will do this, if they will be allowed to reveal these actions of the “dark powers”. 

[13] See, Rose and Kolari (1995, pp. 29-57).

[14] << JH megavlh duvnamh tou` tavgmatov~ ma~ (illuminati) brivsketai sthv mustikovthtav tou. Mhvn ajfh`-

ste potev nav fanerwqei` tov pragmatikov tou o[noma, ajllav nav tov kaluvptete pavnta mev e{na a[llo o[no-ma, miva a[llh drasthriovthta.>>  (Adam Weishaupt).

[15] Key legislative changes in bank regulation from 1980 to 2010:

(1)     Depository Institutions Deregulation and Monetary Control Act of 1980. Raised deposit insurance from $40,000 to $100,000 per depositor; began the phase-out of interest rate ceilings; allowed depositories to offer NOW accounts nationwide; eliminated usury ceilings; granted nonbank thrift institutions broader deposit and credit powers like those possessed by banks; imposed uniform reserve requirements on all depository institutions and gave them access to Federal Reserve services.

(2)     Garn-St Germain Depository Institutions Act of 1982. Permitted money market deposit accounts to banks and thrifts; permitted banks to purchase failing banks and thrifts across state lines; expended thrift commercial and consumer lending powers, to make commercial real estate loans and purchase municipal revenue bonds; permitted thrifts to accept some demand deposit accounts from business firms; gave the FDIC and FSLIC broader authority to deal with failing depository institutions.

(3)     Competitive Equality in Banking Act of 1987. Allocated $10.8 billion in additional funding to the FSLIC; Authorized forbearance program for farm banks; reaffirmed that the “full faith and credit” of the Treasury stood behind deposit insurance; gave to the FDIC power to take over failing banks and to arrange interstate mergers; non-deposit companies were permitted to acquire depository institutions with $500 million or more in total assets; mutual thrifts were allowed to organize mutual holding companies and to issue stock without fully converting to stockholder-owned institutions.

(4)     Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Provided $50 billion of taxpayer funds to resolve thrifts; replaced Federal Home Loan Bank Board with the Office of Thrift Supervision to regulate and supervise thrifts; restructured thrift deposit insurance and raised premiums, the FDIC was given responsibility for insuring savings and loan deposits as well as bank deposits in two separate insurance funds, the Bank Insurance Fund (BIF) and the Savings and Loan Insurance Fund (SAIF); reimposed restrictions on thrift lending activities; directed the Treasury to study deposit insurance reform; allowed bank holding companies to acquire savings and loans; the Resolution Trust Corporation (RTC) was set up to liquidate failing S&Ls taken over by the U.S. government; Savings and loans were prohibited from acquiring “junk” bonds, and their holdings of commercial real estate loans was limited to no more than 400% of capital; and to qualify as a thrift lender (QTL) and receive tax benefits as an S&L, a thrift institution must hold at least 79% of its assets in mortgages and mortgage-related instruments.

(5)     Federal Deposit Insurance Corporation Improvement Act of 1991. Imposed risk-based deposit insurance pricing (fees); provided additional funding and borrowing authority for the FDIC; gave federal regulatory agencies the power to close an undercapitalized bank or thrift; required “prompt corrective action” of poorly capitalized banks and thrifts and restricted “too big to fail”; directed the FDIC to resolve failed banks and thrifts in the least costly way to the deposit insurance fund; federally supervised savings institutions were allowed to loan up to 35% of their total assets to consumers and were permitted to merge or consolidate with commercial banks; depository institutions were required to use licensed appraisers to evaluate any significant amounts of real property used as investments or as collateral for loans; imposed new rules on foreign bank expansion inside the U.S.; and undercapitalized depository institutions may be prohibited from accepting brokered deposits and from paying dividends to their stockholders and may be placed in receivership even though they may still be technically solvent.

(6)     Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Permitted banks and bank holding companies to purchase banks or establish subsidiary banks in any state nationwide. Permitted national banks to open branches or convert subsidiary banks into branches across state lines.

(7)     Financial Services Modernization (Gramm-Leach-Bliley) Act of 1999. Authorized financial holding companies (FHCs) to engage in a full range of financial services such as commercial banking, insurance, securities, and merchant banking; gave the Federal Reserve and the Treasury direction to authorize new financial activities or complementary activities for FHCs; established the Federal reserve as the “umbrella” regulator for FHCs; provided low-cost credit to community banks; reformed the Community Reinvestment Act; and eliminated unitary thrift holding companies.

(8)     Federal Deposit Insurance Reform Act of 2005. Deposit insurance coverage on qualified retirement accounts was increased to $250,000; the BIF and SAIF insurance funds were combined into the Deposit Insurance Fund (DIF); and federal insurance agencies empowered to increase insurance coverage to combat inflation every five years beginning in 2010 if this step appears warranted.

(9)     Financial Services Regulatory Relief Act of 2006. Attempted to eliminate unnecessary and overly burdensome regulations applying to depository institutions, including new service powers for selected thrift institutions and authorized the Federal Reserve to pay interest on legal reserve balances and to lower the required reserve ratio on transaction accounts to zero if warranted, effective October 2011.

(10)    Financial Regulations Proposed in 2009. The Consumer Financial Protection Agency was originally proposed in 2009. Banks lobbied against it, but may be mollified if it is under the Fed. The other proposals from 2009 are still in limbo: Bank regulations would be consolidated under a new National Bank Supervisor. Banks would have to increase their capital cushion. Issuers of products sold on the secondary market would have to keep at least 5% of the value of their products sold. They would have new reporting requirements, as well. Credit rating agencies, such as Standard & Poor’s and Moody’s, would face regulations designed to reduce conflict of interest.

(11)  On May 20, 2010, the Senate approved its version of the Bank Reform Bill. It sets up a Consumer Financial Protection Agency to be under the Federal Reserve. It gives regulators the authority to split up large banks so they do not become “too big to fail.” It eliminates loopholes for hedge funds, derivatives and mortgage brokers. Known as the “Volcker Rule,” it bans Wall Street banks from owning hedge funds. It gives states the right to regulate banks, overriding Federal regulations if needed to protect the public. It also suggests an independent agency that has the authority to review systematic risks that would affect the entire financial industry. It reduces executive pay by allowing shareholders a non-binding vote. See, Bank Reform Bill.

[16] The U.S. banking industry had its first loss in derivatives trading last year, driven by a fourth-quarter $9 billion rout in credit markets. U.S. commercial banks lost $836 million in 2008 from trading over-the-counter cash and derivatives contracts, compared with a $5.5 billion gain in 2007, the Office for the Comptroller of the Currency said in a report. Among the five largest banks trading derivatives, only Goldman Sachs Group’s bank unit reported a revenue gain in the fourth quarter. Banks lost $9.2 billion in the quarter ending December 31, 2008, with $9 billion stemming from credit market losses. Foreign exchange generated $4.1 billion in gains, with commodity trading producing $338 million in revenue. Interest-rate trading declined $3.4 billion, with equities losing $1.2 billion, OCC said. (, March 27, 2009).

[17] See, Cornell (2009). This sub-culture is actually a social waste, which has no future.

[18] The criterion must be objectively measured and Pareto-optimal one. According to Pareto-optimal criterion any change in our social-economic system that makes at least one individual better-off and no one worse-off is an improvement in the social welfare. See, Kallianiotis (2009). 

[19] We have created tremendous asymmetric information (different parties in a financial contract do not have the same information), which led to adverse selection (risk-loving bankers engaged in highly risky activities) and moral hazard (the existence of insurance and bailouts provided increased incentives for these greedy bankers to take risk) problems that had a deadly impact on our unregulated free-market financial system.

[20] The last data are on 9/30/2008. FDIC, Historical Statistics on Banking.

[21] See, The Wall Street Journal, September 27, 2010, pp. C1 and C6.

[22] Recent deregulatory efforts prior to the passage of Gramm-Leach-Bliley Act of 1999:

(1)     April 30, 1987; Federal Reserve authorizes limited underwriting activity for Bankers Trust, J. P. Morgan, and Citicorp, with a 5% revenue limit on Section 20 ineligible securities activities. (Chairman of the Fed: Paul Volcker)

(2)     January 18, 1989; Federal Reserve expands Section 20 underwriting permissibility to corporate debt and equity securities, subject to revenue limit. (Chairman of the Fed: Alan Greenspan).

(3)     September 13, 1989; Federal Reserve raises limit on revenue from Section 20 ineligible securities activities from 5% to 10%. (Chairman of the Fed: Alan Greenspan).

(4)     July 16, 1993; Court ruling in Independent Insurance Agents of America v. Ludwig allows national banks to sell insurance from small towns.

(5)     January 18, 1995; Court ruling in Nations bank v. Valic allows banks to sell annuities.

(6)     March 26, 1996; Court ruling in Barnett Bank v. Nelson overturns states’ restrictions on banks’ insurance sales.

(7)     October 30, 1996; Federal Reserve announces the elimination of many firewalls between bank and nonbank subsidies within bank holding companies (BHCs). (Chairman of the Fed: Alan Greenspan).

(8)     December 20, 1996; Federal Reserve raises limit on revenue from Section 20 ineligible securities activities from 10% to 25%. ). (Chairman of the Fed: Alan Greenspan).

(9)     August 22, 1997; Federal Reserve eliminates many of the remaining firewalls between bank and nonbank subsidiaries within BHCs. (Chairman of the Fed: Alan Greenspan).

(10)  April 6, 1998; Citicorp and Travelers Group announce merger initiating a new round of debate on financial reform.

Source: Lown, Osler, Strahan, and Sufi (2000, Table 2, p. 41).

Paul Volcker, a Democrat, was appointed Chairman of the Federal Reserve in August 1979 by President Jimmy Carter and reappointed in 1983 by President Ronald Reagan. Volcker’s Fed is widely credited with ending the United States’ stagflation crisis of the 1970s. Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983. The federal funds rate, which had averaged 11.2% in 1979, was raised by Volcker to a peak of 20% in June 1981. The prime rate rose to 21.5% in ’81 as well.  These changes in policy contributed to the significant recession the U.S. economy experienced in the early 1980s, which included the highest unemployment levels since the Great Depression. Nobel laureate Joseph Stiglitz said about him in an interview: “Paul Volcker, the previous Fed Chairman known for keeping inflation under control, was fired because the Reagan administration didn’t believe he was an adequate de-regulator.”

Alan Greenspan, Economist and chairman of the Federal Reserve Board. Considered by many to be the second most powerful man in the United States, Greenspan has headed the seven-member board from August 11, 1987 until January 31, 2006, doggedly fighting to keep inflation down and increase consumer confidence in the economy. In 1999, debate began among Presidential hopefuls regarding the future of the Fed chairman, whose term expires in June 2000. On October 28, 1999, in a speech to a group of Florida businessmen, Greenspan stated without ambiguity that the American economy’s current rate of growth is not sustainable, and warned that job growth must slow down in order for inflation to stay under control. As usual, his pronouncement caused a stir in the financial community, as many wondered whether Greenspan would again raise interest rates.

[23] The social objective must be minimization of the Social Distress Index (SDI). , where, =unemployment rate, =inflation rate, and =total debt/GDP (public and private as a percentage of the GDP). In the U.S. the index is now: , which reveals that the country is extremely distressful (in very high risk).

[24] A credit default swap (CDS) is a swap contract, in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) undergoes a defined  “credit event”, often described as a default (fails to pay). However the contract typically construes a Credit Event as being not only ‘Failure to Pay’, but also can be triggered by the ‘Reference Credit’ undergoing restructuring, bankruptcy, or even (much less common) by having its credit rating downgraded. CDS contracts have been compared with insurance, because the buyer pays a premium and, in return, receives a sum of money if one of the events specified in the contract occurs. However, there are a number of differences between CDS and insurance, for example:

  • The buyer of a CDS does not need to own the underlying security or other form of credit exposure; in fact the buyer does not even have to suffer a loss from the default event. In contrast, to purchase insurance, the insured is generally expected to have an insurable interest such as owning a debt obligation;
  • the seller need not be a regulated entity;
  • the seller is not required to maintain any reserves to pay off buyers, although major CDS dealers are subject to bank capital requirements;
  • insurers manage risk primarily by setting loss reserves based on the Law of large numbers, while dealers in CDS manage risk primarily by means of offsetting CDS (hedging) with other dealers and transactions in underlying bond markets;
  • in the United States CDS contracts are generally subject to market to market accounting, introducing income statement and balance sheet volatility that would not be present in an insurance contract;
  • Hedge accounting may not be available under US Generally Accepted Accounting Principles (GAAP) unless the requirements of FAS 133 are met. In practice this rarely happens.

However the most important difference between CDS and Insurance is simply that an insurance contract provides an indemnity against the losses actually suffered by the policy holder, whereas the CDS provides an equal payout to all holders, calculated using an agreed, market-wide method. There are also important differences in the approaches used to pricing. The cost of insurance is based on actuarial analysis. CDSs are derivatives whose cost is determined using financial models and by arbitrage relationships with other credit market instruments such as loans and bonds from the same ‘Reference Entity’ to which the CDS contract refers. Insurance contracts require the disclosure of all risks involved. CDSs have no such requirement, and, as we have seen in the recent past, many of the risks are unknown or unknowable. Most significantly, unlike insurance companies, sellers of CDSs are not required to maintain any capital reserves to guarantee payment of claims. In that respect, a CDS is an insurance that insures nothing! Only the borrower is suffering with high risk premium from these speculators.

[25] See, The Wall Street Journal, March 10, 2010, pp. A1 and A8.

[26], December 8, 2009. This pressure on Greece is very suspicious. It seems that the dark powers want to accept Turkey into EU and they are afraid that Greece might provide objections. Every thing is controlled by the dark powers, today, and poor Orthodox Greece has to face their hatred.

[27] A Moody’s statement said it was cutting Greece’s government bond ratings by four notches to Ba1 from A3, with a stable outlook for the next 12-18 months. It was the second of the three major agencies to accord Greek bonds junk status. Standard & Poor’s did the same in late April 2010. The downgrades reflected concern that the country could fail to meet its obligations to cut its deficit and pay down its debt, which the Greek government said it was out of the question.  See, Associated Press, 6/15/2010. The rating for Greek government bonds was reduced further to “junks”. TV News ERT, May 23, 2011.

[28] The U.S. Federal Reserve’s “easy money” policies during the first part of this decade didn’t cause the housing bubble, former Chairman Alan Greenspan wrote in the Wall Street Journal. A surge in growth in China and other emerging markets led to an excess of savings that pushed global long-term interest rates down between early 2000 and 2005, Greenspan wrote in an article. That caused mortgage rates and the benchmark Fed-funds rate to diverge after moving “in lockstep” from 1971 to 2002, he said. The article is part of the former Fed chief’s defense against charges in books such as “Greenspan’s Bubbles” by William A. Fleckenstein that his policy of keeping rates too low for too long inflated the housing bubble. The collapse in the U.S. subprime-mortgage market led to about $1.2 trillion in writedowns and the bankruptcy of Lehman Brothers Holding Inc. (, March 11, 2009).

[29] Bernanke did not think how bad things were and how much worse they would become, because he did not yet see the subprime mortgage mess, at that time.

[30] Taxes must be put only on income and not on a home that a person needs to shelter his family. These policies do not improve social welfare, but instead increase individuals’ cost and stress, and make capitalism a value questionable system.

[31] In 2009, the relative cost of owning versus renting is swinging back in favor of homeownership in some markets. See, The Wall Street Journal, February 25, 2009, pp. A1 and A3.

[32] The most famous of the credit scoring systems in use today was developed by Fair Isaac Corporation (FICO). The traditional cutoff for distinguishing between prime and subprime borrowers is a FICO scores of 620.

[33] A year ago the 6-month LIBOR was 2.36625% and on October 3, 2008 had reached 4.13125%. (The Wall Street Journal, October 4-5, 2008, p. B13).

[34] For a 30-year subprime ARM originated between 2004 and 2007, the loan’s fixed interest rate the first two years ranged from 7.3% in 2004 to 8.6% in 2007. See, Foote, Gerardi, Goette, and Willen (2008, p. 8).

[35] The Chronology of TALF was:

November 25, 2008:    Fed announces the creation of the term asset-backed securities loan facility (TALF) under the

Federal Reserve Act’s Section 13(3), a Depression-era provision that allows the central bank               broad powers to make loans in difficult economic times.

December 19, 2008: TALF loan maturities are increased from one to three years. TALF loans will be distributed to

    all eligible borrowers rather than through an auction process.

February 10, 2009:  The Fed announces its willingness to expand the TALF to as much as $1 trillion. Eligible

collateral could be broadened to include highly rated commercial-mortgage-backed securities (CMBS) and private-label asset-backed securities (ABS) backed by residential mortgages.

March 3, 2009:          Fed puts the TALF into operation, with subscriptions accepted beginning March 17.

March 19, 2009:        Fed expands the eligible collateral to include ABS backed by loans or leases related to business

                                    equipment, vehicle fleet leases, floorplan loans and mortgage servicing advances.

March 23, 2009:        Fed and Treasury expand eligible collateral to include legacy securities to complement the

    Treasury’s Public-Private Investment Program.

May 1, 2009:              Fed announces that newly issued CMBS and securities backed by insurance premium finance

loans would be eligible collateral, beginning in June. TALF loans with maturities of five years   are also authorized.

May 19, 2009:            Fed announces that certain high-quality CMBS issued before January 1, 2009, (legacy CMBS) 

    would become eligible collateral beginning in July.

August 17, 2009:      Fed and Treasury announce that the TALF is extended through March 31, 2010, for loans

against newly issued ABS and legacy CMBS. TALF lending against newly issued CMBS is extended through June 30, 2010.


Source: Economic Letter, Federal reserve Bank of Dallas, Vol. 4, No. 6, August 2009, p. 7.     

[36] In addition, the inequality of labor market earnings in the U.S. has increased dramatically in recent decades. Closer examination of the data reveals two distinct periods of rising inequality: 1973-1989 and 1989-2005. The first period was one of diverging wages throughout the distribution, while the second was one of polarizing wage growth, in which job growth is concentrated among both highly education-intensive abstract jobs and comparatively low-education manual jobs. (David H. Autor, “Explaining Trends in Wages, Work, and Occupations”, Chicago Fed Letter, No. 261, April 2009). But, this current financial crisis will destroy the productivity of highly educated workers because they will be unemployed and will lose their training, their on job-practice, their updating, and their return on investments in higher education will decline. The growing importance of manual tasks will tend to increase the earnings of less educated workers; also, the high labor supply to services will keep wages low. Business schools will face big challenges very soon, too.    

[37] See, Bogle (2005).

[38] See, Jerry Goldberg (

[39] See, Du, Cullinan, and Wright (2007).

[40] The pay of CEOs has risen so much, as well as the pay of hedge fund investors, of professional baseball, basketball, and football players, and of some reporters, actors, and singers. Such compensations are absurd and they are paid with other people’s money (by increasing social cost, inequality, and envy); a clear example of the “agency problem”.

[41] “You need to get the U.S. on board, otherwise the effect will be minimal because trading will simply move elsewhere,” said Jan Hagen, head of the financial services group at the European School of Management and Technology in Berlin. “A ban would allow European politicians to tell voters at least they’re doing something.”, March 11, 2010. 

[42] See, The Wall Street Journal, March 9, 2010, pp. A1 and A9.

[43] See, The Wall Street Journal, March 29, 2010, pp. A1 and C1.

[44] It was Greenspan himself who did not understand — much less “fully understand”– that the Fed’s lax mortgage regulation and easy monetary policies were setting America up for a disastrous fall. At the same meeting, Jack Guynn, the president of the Federal Reserve Bank of Atlanta, warned of “growing concern about potential overbuilding and worrisome speculation in the real estate markets, especially in Florida” and buyers were “freely admitting that they have no intention of occupying the units or building on the land but rather are counting on flipping.” Had the Fed publicized such concerns, it might have led to a crackdown and forestalled millions of bad mortgages that would be written over the following 2 1/2 years. Instead, the Fed released minutes with sanitized phrases that had been stripped of alarming language. Greenspan’s imperial presumptions remind us that no new law can prevent future regulators (or, for that matter, future bankers) from making mistakes. And as Congress heads toward the final phase of legislating reform, it should drop the pretense that it can control the actions of government officials. This emphasis is misplaced. We can not hope to forecast the particular crises that will arise. Much less can we prescribe how officials will respond. Rather than dictating how government reacts to a financial disaster, we should aim to minimize the likelihood that one recurs, and limit the panic if it does. The overhaul bills go a long way toward corralling off-balance-sheet risk by insisting that derivatives trade on exchanges, where they would be subject to margin or collateral requirements. This is a big step forward. Until now, though, the proposals have suffered from a glaring hole: There has been no hard language to restrain borrowing. Bills in the Senate urged the creation of a new “systemic risk regulator” to monitor debt. The House bill went a step better, limiting leverage to 15-to-1, but only for banks judged to be systemically important. Senator Jon Tester, a Montana Democrat, has offered an amendment that gets even closer. Banks would be charged an insurance premium on every dollar of assets less their equity. The net effect is a charge on each dollar of borrowings. The Federal Deposit Insurance Corporation has been levying such a charge, temporarily, but typically it charges a premium only on deposits. The Tester proposal would, permanently, impose premiums on all bank liabilities. See,, May 7, 2010.

[45] See,, May 19, 2011.

[46] Bullard, Neely, and Wheelock (2009) call this risk as “systemic risk” (=the possibility that a triggering event, such as the failure of an individual firm, will seriously impair other firms or markets and harm the broader economy).


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