Now, you may think you've found a particularly rich and deep thread of anti-government, anti-regulation sentiment here on this site. As a result, you may believe that our opinions are extremist views and perhaps ought not to be taken seriously. If that's the case, you might do well to look at some other resources.
We'd like to suggest After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead, by Alan S. Blinder. We're also mildly enthusiastic about Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself by Sheila Bair. You might really like, as we did, Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street by Neil Barofsky. These came out in January 2013, 2012, and 2012 respectively. So they fairly current.
Blinder is an economist at Princeton University. He has formerly worked as the vice chair of the Federal Reserve System from 1994 to 1996. More on his background is available here: http://en.wikipedia.org/wiki/Alan_Blinder
Bair is a government functionary who has worked at FDIC, Treasury, and the Commodity Futures Trading Commission under Clinton, Bush, and Obama, since 1993. More on her background here: http://en.wikipedia.org/wiki/Sheila_Bair
Barofsky is also a government functionary, having worked as a lawyer for the United States Attorney for the Southern District of New York, and as special inspector general for the Treasury's troubled asset relief program (SIGTARP). More on his background here: http://en.wikipedia.org/wiki/Neil_Barofsky
The point of mentioning their books and their backgrounds is to indicate that there is clearly a lot wrong with the financial system, including especially the government agencies that are supposedly regulating and overseeing it. The Meltdown, as we are calling it, which began with the "sub-prime mortgage" market in 2006, has resulted in enormous difficulties: foreclosures reached previously unheard levels, unemployment spiked, banks and financial enterprises were at risk of failure, and huge amounts of money were pledged to bail them out. As with the Great Depression and many other panics and recessions, government regulation has apparently failed, badly, to protect the public from problems.
All three books were reviewed in The New York Review in March 2013 by Jeff Madrick. I've highlighted a few of the best paragraphs from his essay, "Too Little, Too Late: Why?" and quote them below.
"The Treasury now reports that losses will finally be close to $50 billion when all is said and done."
"The public's angry reaction to the bailout of bankers seemed to extend to government intrusiveness of any kind, even the financial reregulation act known as Dodd-Frank...".
"Sheila Bair, head of the Federal Deposit Insurance Corporation...began to warn about mortgage fraud in the early 2000s. She couldn't get either the Federal Reserve or Congress to take action...Alan Greenspan and others paid no heed."
"In retrospect, the financial world started coming apart in late 2007, even though foreclosure rates on mortgages had begun rising rapidly by 2006, while home prices had begun falling. We can see now that far too many 'subprime' and other innovative but risky mortgages were issued to people who would not be able to keep to their repayment schedules. The Federal Reserve started to cut interest rates rapidly in late 2007 and through 2008, but this wasn't sufficient to generate more rapid growth in the Gross Domestic Product. Indeed, the recent publication of the 2007 minutes of the Open Market Committee, which makes policy decisions at the Fed, showed embarrassingly that the members had no idea the subprime crisis could spread and thought it would have minor consequences at worst."
Let's take a moment on that one, please. The most powerful government regulatory agency, the Federal Reserve System, including some of the brightest minds in the world on financial matters, had no idea that the subprime mortgage crisis could spread and thought it would have minor consequences. And you want how much government regulation of Bitcoin?
"The giant insurance company AIG had sold guarantees on hundreds of billions of dollars of mortgage securities. Now it had to be bailed out, or it would also collapse. Bernanke writes, "In our judgement, the failure of AIG would have been basically the end."
"More important, the complex and widely sold mortgage securities known as collateralized debt obligations were more vulnerable to the failures of subprime mortgages than economists or federal officials had known.... The collapse was not just a matter of a burst housing bubble leading to reduced consumer spending. It was a collapsing house of cards, the failure of one risky security leading to the failure of another."
"Barofsky was especially disturbed...that there were no requirements for the banks to report how they spent the money provided by the taxpayers. ... Geithner bent over backwards to protexct the banks. The New York Times published an article in early 2009 about Barofsky's concerns, in which it reported that lending to business was not the highest priority of the rescued banks. they were using the money to pay down debt, make acquisitions, or build up their savings."
"AIG's creditors, including Goldman Sachs, were paid 100 cents on the dollar - a source of much public indignation."
"It was Paulson who at first opposed any serious restrictions on compensation to the very executives who were responsible for the collapse. Wall Street professionals were paid enormous sums when all was going well, but they bore little loss when markets turned against them. The incentives to overspeculate were thus out of control."
"But Barofsky writes that Treasury insiders still believed the bonuses were necessary to keep the best-qualified people at work — 'No matter that the financial crisis had demonstrated just how unremarkable the work of those executives had turned out to be.'"
"Larry Summers, then Obama's chief economic aide, went on TV to argue that he was outraged by the bonuses but he still insisted that contracts with the bankers must be honored. This was a farce, according to Barofsky. Contracts with mortgage holders and with employees were being broken all the time, he points out. Private and public pensions were being renegotiated across the country. Surely the federal government, which owned 80 percent of AIG, could have negotiated the bonuses down with the AIG employees."
"At one point, according to Barofsky, the federal government overall had promised some $23 trillion to rescue financial institutions, a sum that created momentary alarm when Barofsky made it public."
"Thus, to use later financial returns in order to claim that TARP was one of the most effective government programs of all time as former Treasury secretary Michael Geithner has said is misleading and disturbing."
"One other decision by Geithner and his team is especially hard to understand. No member of top management was ever asked to leave his or her post in return for the bailout funds, even at Citigroup, the bank arguably in the worst condition."
"The most egregious failure of TARP, however, was that both the Bush and Obama administrations never adequately used the funds to reduce mortgage debt for Americans, even though help for homeowners was a principal part of the TARP legislation. Nearly four million foreclosures were occuring each year. Only in 2012 did that number fall to less than three million."
Notice, please, that 4 million in 2009, 4 million in 2010, 4 million in 2011, and 3 million in 2012 adds up to 15 million foreclosures in those four years, plus an unknown number in 2006, 2007, 2008, 2013, and 2014. It is hard to see how TARP, or any other government regulation of the financial system, can be called a success in light of these figures.
Now, if you are one of those people who think that regulation of the financial services industry is a good thing, maybe that's because you imagine that you'd be given $23 trillion in guarantees and bail-out funds of various kinds, and that your compensation would be protected by the people you imagine would be charged with regulating your industry. You might be right in thinking that the enormous power that a cartel of a small number of companies can exert in limiting the scope of government regulations, promoting the bail-outs of industry participants (especially in the cartel itself), and limiting the downside cost to you of making boneheaded investments would protect your interests. But you might also consider how close the country came to having crowds of angry depositors chasing bankers through the streets of upscale neighbourhoods with pitchforks, torches, and implements of destruction. If you don't have nightmares about streets lined with bankers hanging by their necks from every tree and lamp post, you might not have been in the financial services industry in February 2009.
Whatever else you may wish to say about the Meltdown, it is clear that regulations of the financial services industry failed. They continue to fail to this day.
One final thought. Many of the mortgages that were re-financed in 2009 and 2010 had adjustable rates that would re-adjust in 2014 and 2015. Although many people feel that doom was averted, it may have simply been postponed.