Banks aren't to blame for economic crisis, consumers are
This claim by McKinsey Global Institute is absurd! We add comments to show why.

By Jim Landers, Dallas Morning News, 1/18/2010

http://www.dallasnews.com/sharedcontent/dws/bus/columnists/jlanders/stories/DN-landers_19bus.ART.State.Edition1.3f6cd24.html

We are in a global debt crisis. In some parts of the world and in some parts of the U.S. economy, the extent of the damage isn't even apparent yet.

The main reason? 

It wasn't investment banks borrowing wildly.[HOT: Really?  Isn’t the Financial Crisis Inquiry Commission looking into just that? See next article, below.]  It wasn't corporations running up debt instead of issuing new stock shares. [We know of no allegations that this type of activity played any role in the financial collapse.]  It wasn't the federal government. [Despite overwhelming evidence to the contrary? Does Mr. Landers really think Congress, the Federal Reserve, SEC, and other federal agencies bear no blame for deregulation and for allowing the financial collapse to happen under their noses? Amazing.]

A new analysis by the McKinsey Global Institute lays most of this debt at the feet of middle-class consumers – Americans, Britons, Canadians and others – who bought more house than they could afford.

[HOT: Blaming the American consumer is absurd! Everyone was pushing the dream of homeownership, including the federal government through mortgage interest tax deductions, artificially low interest rates, loan guarantees with low down-payment requirements, and now the homebuyer tax credit. George W. Bush, like Bill Clinton before him, pushed Homeownership and The American Dream. The companies that built and financed the homes joined government as culprits. They pushed homeownership onto people who couldn’t afford a home and convinced them that a home is a “no lose investment” with no down-side risk. No reasonable consumer would sit idle on the sidelines as they watched property values rise faster than stocks and their friends and neighbors profit. Banks, builders and the US Government had all of the tools to know that a housing bubble was close to bursting. Consumers did not. Consumers were pragmatic and practical, and McKinsey should know that.]

American consumers have responded by paying down their debts, curbing purchases and putting more into savings. Similar actions are spreading across the developed world.

This won't last for just a year or two. McKinsey's researchers say deleveraging – reducing debt – typically goes on for six to seven years in the aftermath of a financial crisis.

"In just three cases in our sample were economies able to grow out of debt solely because of rapid economic expansions – and all three were fueled by war, such as the U.S. experience during World War II, or oil booms," concludes the analysis titled, "Debt and Deleveraging: The Global Credit Bubble and its Economic Consequences."

If the U.S. economy crawls for the next several years, that's going to seem especially galling to Texas.

As reported by my colleague Steve Brown earlier this month, David Crowe, chief economist of the National Association of Home Builders, holds Texans harmless:

"You came to this a little bit later than other markets, and it wasn't your doing," he said. "You weren't California, Florida, Nevada or Arizona," states where home prices collapsed after surging through most of the last decade.

"You really are just an innocent bystander in this recession," Crowe said.

High foreclosure rates in Dallas, Houston and other parts of the state belie that blanket amnesty, but the bubble was nowhere near as bad in Texas as it was in several other states (and several other countries).

McKinsey researchers suggested there's more trouble ahead.

"The bursting of the great credit bubble is not over yet," they found.

Still to come are a raft of triggered adjustable-rate mortgages for residential consumers and staggering amounts of debt due for commercial real estate.

The report found that $1.3 trillion of U.S. commercial real estate loans will come due in the next four years. Refinancing all that debt will be a challenge after the 2008 meltdown in the practice of bundling such loans into marketable securities.

That's where investment banks had their debacle. Mortgages sold as bonds in markets around the world fell apart with the collapse of Lehman Brothers. Investment banks had a mountain of debt, but not as big as consumer debt. [HOT: No. They fell with the collapse of HOME PRICES due to over-building and over-financing, where people were encouraged to invest in housing, and supply outstripped demand.]

"Households account for the largest share of total debt in the United States, Canada and Switzerland," concluded the authors. From 2000 to 2008, U.S. household debt had grown $6.8 trillion. Financial institution debt rose $3.9 trillion. Government debt was up $4 trillion.

The average American household increased the amount of debt as a share of household income by a third.

You would expect banks and consumers to tighten their belts in the face of these numbers. As they've done that, the federal government was left to pick up the slack in the economy. Federal borrowing has soared, even as the enormous retirement and health care costs of the baby boom generation loom on the near horizon.

McKinsey's economists warned that curbing federal spending too soon would repeat mistakes that prolonged the Great Depression in the U.S. and Japan's lost decade of the 1990s.

To keep from repeating this, McKinsey economists urged governments to consider curbing incentives for homebuying, such as the deduction of interest paid on mortgages.

Bankers Without a Clue

By PAUL KRUGMAN, New York Times Op-Ed Columnist, 1/14/2010

http://www.nytimes.com/2010/01/15/opinion/15krugman.html?scp=1&sq=krugman%20pecora&st=cse

The official Financial Crisis Inquiry Commission — the group that aims to hold a modern version of the Pecora hearings of the 1930s, whose investigations set the stage for New Deal bank regulation — began taking testimony on Wednesday. In its first panel, the commission grilled four major financial-industry honchos. What did we learn?

Well, if you were hoping for a Perry Mason moment — a scene in which the witness blurts out: “Yes! I admit it! I did it! And I’m glad!” — the hearing was disappointing. What you got, instead, was witnesses blurting out: “Yes! I admit it! I’m clueless!”

O.K., not in so many words. But the bankers’ testimony showed a stunning failure, even now, to grasp the nature and extent of the current crisis. And that’s important: It tells us that as Congress and the administration try to reform the financial system, they should ignore advice coming from the supposed wise men of Wall Street, who have no wisdom to offer.

Consider what has happened so far: The U.S. economy is still grappling with the consequences of the worst financial crisis since the Great Depression; trillions of dollars of potential income have been lost; the lives of millions have been damaged, in some cases irreparably, by mass unemployment; millions more have seen their savings wiped out; hundreds of thousands, perhaps millions, will lose essential health care because of the combination of job losses and draconian cutbacks by cash-strapped state governments.

And this disaster was entirely self-inflicted. This isn’t like the stagflation of the 1970s, which had a lot to do with soaring oil prices, which were, in turn, the result of political instability in the Middle East. This time we’re in trouble entirely thanks to the dysfunctional nature of our own financial system. Everyone understands this — everyone, it seems, except the financiers themselves.

There were two moments in Wednesday’s hearing that stood out. One was when Jamie Dimon of JPMorgan Chase declared that a financial crisis is something that “happens every five to seven years. We shouldn’t be surprised.” In short, stuff happens, and that’s just part of life.

But the truth is that the United States managed to avoid major financial crises for half a century after the Pecora hearings were held and Congress enacted major banking reforms. It was only after we forgot those lessons, and dismantled effective regulation, that our financial system went back to being dangerously unstable.

As an aside, it was also startling to hear Mr. Dimon admit that his bank never even considered the possibility of a large decline in home prices, despite widespread warnings that we were in the midst of a monstrous housing bubble.

Still, Mr. Dimon’s cluelessness paled beside that of Goldman Sachs’s Lloyd Blankfein, who compared the financial crisis to a hurricane nobody could have predicted. Phil Angelides, the commission’s chairman, was not amused: The financial crisis, he declared, wasn’t an act of God; it resulted from “acts of men and women.”

Was Mr. Blankfein just inarticulate? No. He used the same metaphor in his prepared testimony in which he urged Congress not to push too hard for financial reform: “We should resist a response ... that is solely designed around protecting us from the 100-year storm.” So this giant financial crisis was just a rare accident, a freak of nature, and we shouldn’t overreact.

But there was nothing accidental about the crisis. From the late 1970s on, the American financial system, freed by deregulation and a political climate in which greed was presumed to be good, spun ever further out of control. There were ever-greater rewards — bonuses beyond the dreams of avarice — for bankers who could generate big short-term profits. And the way to raise those profits was to pile up ever more debt, both by pushing loans on the public and by taking on ever-higher leverage within the financial industry.

[HOT: Banking executives were rewarded for taking risks rather than for positive outcomes. With little to no risk if the outcome is bad, the attitude is “What the Hell…?”]

Sooner or later, this runaway system was bound to crash. And if we don’t make fundamental changes, it will happen all over again.

Do the bankers really not understand what happened, or are they just talking their self-interest? No matter. As I said, the important thing looking forward is to stop listening to financiers about financial reform.

Wall Street executives will tell you that the financial-reform bill the House passed last month would cripple the economy with overregulation (it’s actually quite mild). They’ll insist that the tax on bank debt just proposed by the Obama administration is a crude concession to foolish populism. They’ll warn that action to tax or otherwise rein in financial-industry compensation is destructive and unjustified.

But what do they know? The answer, as far as I can tell, is: not much.

Additional Reading:

• Who's to Blame for the Financial Crisis? - Who were the culprits? TIME Magazine names 25. 
• Texas Homebuilding and the Global Collapse - Was it good intentions or something sinister? 
• CRUEL HOPE - Abusive Practices of Homebuilders and Their Mortgages Subsidiaries in CA [& TX]