Financial Crises – Those Who Do Not Learn From History Are Doomed To Repeat It

 

Widely read Wall Street Journal columnist Brett Arends paints a gloomy picture of what is in store for the United States in his article entitled “The next, worse financial crisis.” He cites 10 reasons why the next financial crisis is inevitable and will be worse. To paraphrase, here they are:

    The conventional wisdom about what caused the 2008-2009 financial crisis is wrong and is being put out there as a diversion so the real wrongdoers can get away. Despite popular opinion, Barney Frank and the liberals in Congress did not cause the housing bubble, as there were identical housing bubbles in Europe and elsewhere.

  1. The real culprits not only have not been punished, they have made out like bandits. Arends cites former Lehman CEO Dick Fuld and former Countrywide CEO Angelo Mozilo as examples. They walked away with millions in “ill-gotten gains” but are not facing criminal prosecution. If wrongdoers are not punished, others will not be deterred. Prosecutors depend on regulators like the SEC to obtain evidence they need to prosecute, and that did not happen here. Arends did not say what criminal laws were violated.
  2. The incentives for excessive risk-taking by Wall Street are still in place. “Thanks to restricted stock, options, the bonus game, securitization, 2-and-20 fee structures, insider stock sales, “too big to fail” and limited liability, they are paid to behave recklessly, and they lose little or nothing if things go wrong.”
  3. The flow of money and jobs from Wall Street to Washington, D.C., and the revolving door that exists between the two essentially means that Washington is paid to look the other way. Regulators and lawmakers “play nice” to obtain money and jobs. They issue lunch invitations instead of subpoenas. The net result is that there is no effective enforcement of securities laws.
  4. Stocks have run up too high and are poised to fall. According to one yardstick cited by Arends, they are 70% overvalued.
  5. Derivatives, the financial instruments that include the toxic mortgage-backed securities that wrecked the financial system, are a bigger problem today than they were in 2008. At the height of the last bubble, the book value of derivatives on Wall Street books was $183 trillion ? an “insane” 13 times the entire U.S. economy. Today, Arends says, they are $284 trillion.
  6. The Wall Street establishment (Bernanke, Geithner, Summers, Goldman Sachs, J.P. Morgan Chase) is still running the economy. (So much for Obama being a socialist.)
  7. Bernanke thinks stimulating the stock market is part of his job, which is beyond the Fed’s legal mandate of trying to keep inflation and unemployment low.
  8. Indebtedness of corporations, government and households is higher than ever ? at least $50 trillion, according to Arends. More debt means more risk.
  9. The real economy is terrible. Unemployment is worse than the official numbers indicate (one out of four middle-aged men do not have a full-time job). Housing price are still falling.

We simply have not learned our lesson. Therefore, according to Arends, we are doomed to repeat the past.

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in investment litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in cases involving all types of public and private investments. For further information, please contact us.