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Thursday October 30th 2014

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House of Sticks: Who to blame

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What do Simon Johnson, Gavin Dobson, Bethany McLean, Michael Lewis, and Andrew Ross Sorkin have in common?

All of them, along with several other authors, wrote excellent books about the ongoing financial crisis. Even CNBC’s Maria Bartiromo got into the act with a short work, compared to Sorkin’s, titled “The Weekend That Changed Wall Street”.

Some of our authors merely tried to deliver the sequence of events with the greatest sense of accuracy and chronology possible. Other authors, however, attempted to recreate the age-old political battle of free enterprise versus the government. Let the finger pointing begin!

Blaming the government for the financial crisis has roots that go back thirty years. The creation of the utopian premise of home ownership for everyone was bantered about in Congress and the White House in the late 1970s. Then Congress took the hit for repealing, in the late 1990s, what was left of the old Glass-Steagall Act….the act that kept the banks, insurance companies, and brokerage firms out of each other’s business. What we tend to forget is that members of our governing bodies often have personal business interests that influence their decision making processes.

So we can point a finger at government for erasing age-old controls that had kept the country out of a major financial crisis for almost seventy years.

The easing of regulation was accomplished with hopes that the financial community would become more competitive and innovative. Get ready to point the other finger. The increased competition, for example, brought down insurance premiums and securities underwriting fees.The innovation, however, created a leveraged global derivatives casino that kinda, sorta, was supposed to be a secret……..until the mortgage markets began to blow up in 2007.

Remember that term “swaps”? Read up on the “credit default swap”, and you’ll find out what happened to some of the planet’s largest banks, investment banks, and insurance companies and why they had to be bailed out to the tune of trillions, not the TARP billions as officially reported.