The Fight of the Century

An Exploration of the Great Credit Crash of 2008 and of Political and Econo ic !deologues"

#$0880%$

&'()!TTE* !+ PA,T F'-F!-)E+T .F T/E *EG,EE .F --")" !+ -A0 A+* !+TE,+AT!.+A- C.))E,CE AT 1'EE+& '+!2E,&!T3 (E-FA&T

&EPTE)(E, 20##

AC4+.0-E*G)E+T&

To the academic faculty at Queens University Belfast who taught on the Law and International Commerce LLM, to them I extend my most sincere a reciation for first sto!ing my interest in this area, for sharing their ex ertise and for reassuring me that this wor! is a road worth traveling" To #octor #ieter $esendorfer for his ertinent and hel ful advice and guidance" To %ndrew &ntwistle and 'incent Ca ucci, the founding artners of Entwistle and Cappucci LLP ( a securities and class action law firm situated on )*+ $ar! %venue and within the heart of the ,ew -or! legal arena ( who so generously granted me a five month wor! lacement, my gratitude is immeasura.le" My time at the firm has .estowed u on me unrivalled ex erience and ex osed me to some of the most to ical and ertinent cases, such as the re resentation of the ,ew -or! /tate Common 0etirement 1und in the ursuit of loses as a result of the Merrill Lynch and Ban! of %merica merger in /e tem.er )++*" Certainly ex osure to the intricacies of such litigation granted me with new and insightful ers ectives which have heavily sha ed my views and comments herein" %nd li!ewise to all the staff at &ntwistle and Ca ucci, who were so good to me, I extend my most sincere a reciation" To my arents, 2ohn and Christine, for their unwavering su ort"

To all those involved in the wider discourse on the causes of the financial crisis I ay my than!s and res ect for they have sha ed my views within" I would highlight that this is an academic osition see!ing to advance a healthy discussion that can go some way to hel ing suggest a route towards a future of long term, sta.le and inclusive economical growth"

A(&T,ACT

This study offers an ex loration into the contentious causes of the financial crisis as well as considering the rinci le ideologues of our time, 1riedrich 3aye! and 2ohn Maynard 4eynes, who have so extensively sha ed financial mar!ets over the ast century" In this context this discussion argues that whilst the ideology that advocates free and com etitive financial mar!ets 51riedrich 3aye! and neoli.eralism6 has .een dealt a heavy .low in the wa!e of the 7reat Credit Crash of )++*, the damage is not terminal" Indeed since the causes of the financial crisis are not limited to the failings of 8all /treet and high finance, .ut rather the reci itating factors were wide and multifarious, this a er argues that li.eral financial mar!ets, al.eit with more sensi.le oversight, will remain a routine as ect of )9st Century life" Beginning .y roviding an introduction that chronicles the rising and falling of the great housing .u..le of the )+++s, this discussion will then outline and ex lain the : deadly shots that came together to cause the deadly asset .u..le" It will then consider the ideology that has under inned finance over the last num.er of decades, after which this a er will highlight that in s ite of the current state of international finances, 1rierich 3aye! and his ideology of individualism and li.erated mar!ets will revail" This a er will argue that in going forward and exiting from the crisis it is im ortant that olicyma!ers recognise that there are im ortant lessons to .e drawn from the actions that were ta!en in res onse to the 7reat #e ression of the 9;<+s" It is also im ortant that they ta!e insights from the ro er consideration of the strong cultural context in which modern %merica ( which so extensively sha es glo.al affairs ( was .orn" 1rom the a.ove and with a num.er of other considerations it will .e demonstrated that des ite the deleterious failings of high finance, man and his rimal desire to ush the .oundaries of human endeavour will ensure a long future for free mar!ets and neoli.eralism"

=8hich way should we choose> More .ottom(u or more to (down> The fight continues" 4eynes and 3aye! third round" Its time to weigh in" More from the to or from the ground> Lets listen to the .asics 4eynes and 3aye! throwin down"

Fight of the Century: Keynes vs. Hayek, ound !.

!+T,.*'CT!.+

The return of 2ohn Maynard 4eynes in the wa!e of the most damaging financial downturn since the 7reat #e ression has s ar!ed a de.ate that challenges the legacy of the 7reat Moderation and the )+ years of calmness that revailed over the vast lains of glo.al financial mar!ets" Indeed voices have risen from the fallout of the financial crisis that continually clammer that 1riedrich 3aye!, neoli.eralism and free mar!ets, that which has defined the last three decades of 8estern economics, is not the End of History" The de.ate has entered mainstream media as e itomised .y the financial lyricism of "Fight of the Century# as seen a.ove, an ideological s arring match that stages a ra .attle .etween the two olitical and economic ideologues of the )+th and )9st Century" ?ne, 1riedrich 3aye! the

exem lar of li.ertarian economics, the other, 2ohn Maynard 4eynes the man of the .ig state, government s ending and interventionary economics" Indeed rom ted .y the "Fight of the Century# the ur ose of this monogra h is to consider financial mar!ets and the changes that are necessary in order to .ring decorum to a world of finance sailing over cho y ideological waters, .attered .y a raging gale of o ulist anger"

In order to do so it is necessary first to understand what in fact caused the worst financial contraction since the 7reat #e ression" 1ittingly the sylla.les, words, ara hrases and meta hors from henceforth will .e the tools at hand as this a er starts on an archaeological dig that see!s to unearth the causes and enter the su.stratum of the 7reat Crash of )++*" 3owever, a crisis that was caused .y a mor.id mix that included a fast and loose monetary olicy, a fanciful federal housing olicy, wides read irrational exu.erance amongst consumers on Main /treet, ram ant excess .y the financial alchemists on 8all /treet and rec!lessness amongst credit rating agencies, this a er wants to dig dee er, down into the cultural form of modern society and into the ideological rhetoric that has sha ed modern finance" Ultimately the goal of this a er is to navigate the tem estuous ideological currents and to consider the future of free mar!ets and to ose an answer to the ideological uncertainty"

PA,T #

T/E G,EAT C,E*!T C,A&/ .F 2008

C/APTE, #5 T/E TE--!+G .F A C-A&&!C TA-E .F (..) A+* ('&T

Innumera.le @eremiads have .een written, told and screened throughout academia, the o ular ress and the wider media telling a classic tale of .oom and .ust" 1ittingly the following section shall attem t to ca ture the mood and chronicle ste .y ste the rise and fall of the glo.al economy"

i" A Fi6e &hot *eadly Coc7tail Fuels a /ousing (u88le

The housing .u..le that started inflating in the mid 9;;+s and carried on until )++A, teetered in )++B and eventually .urst s ectacularly on /e tem.er 9:th )++*" % day that witnessed =history in the ma!ing 5Thain, )++;6 and an event that saw a .illowing real estate .u..le s ew its toxic financial contents across the glo.e" Indeed the contents were a cancerous financial contagion that s read across glo.al ca ital mar!ets in systemic and stratified waves of destruction cri ling credit lines, halting inter.an! lending, freeCing assets and setting the fate of the glo.al economy on a !nife edge" 3owever how did the lethal housing .u..le form in the first lace> 1or over forty years house rices in the ost(war eriod moved in tandem with the overall rate of inflation, .ut from the middle of the 9;;+s the two varia.les diverged and house rices too! off on a steady u ward tra@ectory in the a.sence of any discerni.le inflationary ressure" Indeed the new trend that saw housing rices outstri the rate of inflation ensured that real estate rices in the U"/" rose .y more than B+ ercent .etween 9;;: and )++B"

1igure 9

$ource: %&aker, !'('). The B+ ercent hy er a reciation of real estate had no correlation to core fundamentals, ha ening in a world in which income growth averaged @ust 9"*D annually from )++9 to )++B" In fact, the increase in house rices created more than E*+ trillion in additional housing wealth com ared with a scenario in which house rices had continued to rise at the same rate as inflation 5Ba!er, )++B6" 3owever the causes of the housing .u..le and resulting crisis are com lex and multifarious" Indeed 7illian Tett 5)+996 ca tured the mood and confusion that surrounds the causes of the crisis when she stated that =the anger !ee s festering, li!e a .oil that cannot .e lanced" -et all too often eo le and the o ular ress flog the =greed and ruthlessness of 8all /treet, international finance and of free mar!ets" But to arrive at such a solution is too facile" 0ather the coming together of the housing .u..le was a co ious .lend of a lurality of factors as it is right to say that =most historical events, from wars to revolutions, do not have sim le causes 5/hiller, )++:6 #es ite the difficulties associated with locating the causes of the financial crisis this a er ro oses five rinci le henomena .ehind the housing .u..le, a hit list of five deadly shots that came together to roduce a lethal coc!tail that created the environment for a s eculative and deadly asset .u..le"

10

1irstly, the short(term interest rate olicy of the U"/" 1ederal 0eserve hel ed to nourish an asset .oom" Indeed the ex ansive monetary olicy of the 1ed that ran from )++9 until )++A ensured a liFuid and free flowing mar!et lace that facilitated a lentiful and chea source of credit for the consumer, .usiness and .an!ing" /econdly, it is well documented that increasing homeownershi was an ex licit goal of the Clinton and Bush administration" Thus this a er will see! to ex lore the U"/" governments fanciful housing olicy that forced .an!s to loosen their traditionally rigid mortgage lending standards in order that the .enefits of homeownershi could .e en@oyed .y the less(than( credit(worthy" Thirdly, increased de.t(to(income ratio for consumers and households was a central rotagonist in the tale of the 7reat Crash" Indeed with real estate rices s!yroc!eting consumers were caught u in the mar!et sychology that house rices would rice ad infinitum and as a result they feel infinitely wealthier and consumed credit at a ra acious ace" It was in the words of %lan 7reens an and later 0o.ert /hiller 5)++:6, irrational e*u+erance" 1ourthly, the modern science of financial alchemy that financialised homes and homeowners as carried out .y investment .an!s on 8all /treet converted worthless mortgages into investment grade roducts that in the end ex orted the ills of modern finance worldwide and dee ened the crisis ex onentially" 1ifthly, credit rating agencies layed a starring role in the war ed drama of finance re()++* and their actions merit timely consideration" Indeed these inde endent and wholly unaccounta.le agencies hel ed 8all /treet .an!s to com lete the rocess of modern financial alchemy .y giving their actuarial stam of a roval to fixed(income securities that were in reality worthless @un!" This a er stands .y the five crisis causing ro onents outlined a.ove" Indeed they came together in a mor.id mix and created a reaction that caused the %merican and glo.al economy to go on overdrive, ensuring a voracious u ward inflation of real estate that had no correlation to .asic economic indicators" %s the .u..le grew it s urred on the very factors that caused its genesis in a dangerous and mutually reinforcing ositive feed.ac! loo "

11

These five factors will .e considered later on in the a er as it is first necessary to outline the fall of glo.al finances"

ii" The Great 'n9ind

The ;th %ugust )++B is often cited as the day that the financial crisis announced its resence to the world as the aftershoc!s from the colla se of the su. rime mortgage mar!et s read to the world of high finance 5Bernan!e, )+9+a6" 3owever it remains that the haCy days of %ugust and /e tem.er )++B were only the start of a downward economic s iral as the world would later find out" Indeed things got dramatically worse and .y #ecem.er )++B the onset of the glo.al recession was official as B< months of damaging s eculative ex ansion that had .een .uilt almost entirely u on fictitious housing wealth, came to an end 5The ,ational Bureau of &conomic 0esearch, )++*6" Thereafter the financial chaos from the colla se of the U"/" su. rime mortgage colla se gathered ace and swe t throughout glo.al ca ital mar!ets with devastating effect, hitting 8all /treet at the .eginning of )++* and ushing Bear /tearns ( the fifth largest investment .an! in the U"/" ( towards .an!ru tcy Bear /tearns recorded a loss of E*:G million largely attri.uta.le to heavy su. rime ex osure and only survived through a forced marriage to 2$ Morgan Chase in March )++* than!s to an emergency E<+ .illion loan and a deal ushed through .y the 1ederal 0eserve and U"/" Treasury" 3owever the mar!et chaos continued as IndyMac, the seventh largest mortgage issuer in the U"/" colla sed under the weight of huge su. rime losses in 2uly )++*" %nd as the age turned to /e tem.er )++* one found that life got a whole lot cho ier on the

high seas of high finance" Indeed the mar!et currents stirred violently on the Ath /e tem.er )++* as the U"/" government too! control of the two federally chartered and government( .ac!ed mortgage .ond issuers 1annie Mae and 1reddie Mac, who li!e others had suffered monumental losses associated to su. rime loans" %round the same time Merrill Lynch ( the third largest investment .an! in %merica ( announced record losses due to heavy ex osure to the su. rime mortgage mar!et, rom ting

12

the U"/" Treasury to enforce a shot gun marriage .etween Merrill and Ban! of %merica late in the day of /e tem.er 9Gth )++*" 3owever the nauseating mar!et conditions continued and were exacer.ated as the venera.le Lehman Brothers H the 9:* year old and fourth largest investment .an! in the U"/" ( filed for Cha ter 99 .an!ru tcy roceedings" Indeed the colla se of Lehman Brothers on Monday 9:th /e tem.er )++* remains a landmar! day in which the fate of the world changed forever" % date that will .e remem.ered in er etuum as the day that saw the unleashing of a financial crisis of lanetary ro ortions and a economic contraction that 0aghuram 0a@an 5)++:6 rather resciently foretold would .e =.est shared with future generations" Indeed ost(Lehman colla se it .ecame im ossi.le to maintain any sort of decorum in the mar!et lace" The .an! was a .lac! hole on the landsca e of glo.al finance as ex osure to Lehman as a ma@or counter arty in the world wide we. of financial mar!ets was huge" The effects on glo.al ca ital mar!ets were such that it wasnt @ust .an!s feeling the nauseating effects from the rolling waves on the high seas of finance" Indeed other ma@or lynch ins of the glo.al economy including huge com anies li!e 7eneral &lectric and the three rinci le automotive com anies faced imminent insolvency" % day after Lehmans failure 3an! $aulson, the U"/" Treasury /ecretary, was forced to res ond to the dire calls of Mr" Bailout as %merican Insurance 7rou , Inc" 5%I76 ( the worlds largest seller of credit default rotection ( floundered hel lessly in the deadly currents of the ca ital mar!ets and was thrown an E*: .illion life.elt" 0ather ertinently 7illian Tett 5)++;, ")*6 o.served that =money is the life.lood of the economy, and unless it circulates readily, the essential economic activities go into the eFuivalent of cardiac arrest" Indeed after the Lehman de.acle glo.al financial mar!ets .ro!e down, credit .ecame near extinct =and .y the end of the wee! 5the .an!s6 had to .e ut on artificial life su ort 5/oros, )+9+6"

The glo.al economy was only alive through the direct infusion of sovereign credit .y governments around the world and had %I7 done a Lehman, the mar!et reaction truly would have .een truly a ocaly tic" The mar!et chaos nevertheless continued as on the ):th of the same month the 1ederal #e osit Insurance Com any seiCed 8ashington Mutual, the sixth

13

largest .an! in the U"/" and only four days after, 8achovia, the seventh largest .an! in the U"/" was sold" By the <+th /e tem.er )++* the 1ederal #e osit Insurance Cor oration had laced 9B9 .an!s with com.ined assets of E99A .illion on their ro.lem list 5Congressional ?versight $anel for &conomic /ta.iliCation, )++*6 and on the <rd ?cto.er )++* the U"/" Congress enacted the EB++.n Trou.led %sset 0ecovery $rogram 5T%0$6 in order to stave off a colla se of the .an!ing industry and later .rought into law the Term %sset Bac!ed /ecurity Loan 1acility 5T%L16 in an effort to ensure the survival of ca ital mar!ets" Citigrou got a rescue ac!age in ,ovem.er and Morgan /tanley and 7oldman /achs whose share rices halved, were effectively guaranteed .y the Treasury and transformed into .an! holding com anies ( entities which are su.@ected to far stiffer regulation" Indeed their new status guaranteed that they would have access to the full menu of the 1ederal 0eserves lending facilities, including the central .an!s discount window which would ensure that they would not go down a destructive Lehman ath" Ban! of %merica and 2$ Morgan were shielded from the worst of the de ressed ca ital mar!et conditions than!s to their strong liFuidity rofile and lower ca ital ratios" Indeed their survival could .e accredited to their large commercial .an!ing resence and stoc! ile of traditional retail .an!ing de osits which acted as a .uffer against the worst that the crisis had to offer" 8ithout the heroics of the .an! holding com anies 2$ Morgan and Ban! of %merica, it remains that in all li!elihood Bear /tearns and Merrill Lynch would have done a Lehman for which the re ercussions would have .een unthin!a.le" In the end the olicy activism of the U"/ and other governments, with emergency liFuidity rovision, glo.ally coordinated low interest rates and fiscal stimulus, were successful in sta.ilising the glo.al economy and went some way towards filling the demand hole" ,evertheless the autumn and winter of )++* was a time that will always .e remem.ered as a eriod of un recedented economic intervention ( essentially a eriod in which governments su.sidised where they did not nationalise"

14

3owever the activism of the U"/" and other governments which saved the glo.al economy from extinction ensured the transference of .illions of dollars of toxic rivate de.t onto u.lic sector .alance sheets" In fact the U"/" 1ederal .alance sheet had .egun to loo! li!e that of a giant hedge fund" Indeed the U"/" governments .udget .usting .ailouts and fiscal ac!ages, enacted in order to shore u the %merican and glo.al financial system, left the federal government EB"B trillion out of oc!et" 7overnments worldwide socialised the toxic losses of rivate sector actors and in doing so the seeds were sown a shar and stinging economic contraction, the &uro ean sovereign de.t crisis as well as the glo.al angst surrounding the levels of U"/" federal de.t" Contentious issues that truly threaten the future of the glo.al economy, and moreover contentious issues that continue to sound the death !nell of li.ertarian economic olicies" Thus having outlined the rise and fall of the housing .u..le and the colla se of international finance it is now a ro riate to consider in more detail the : deadly shots and reci itating causes of the financial crisis" ?nly later will it .e a ro riate to consider the 4eynes, 3aye! and &uc!en and their role in the future of economic olicy ma!ing"

15

16

C/APTE, 25 &/.T #: ;&A*.< ).+ETA,3 E=CE&&

A Fast: -oose and *angerous )onetary Policy

The canonical narrative of the 7reat Crash of )++* underscores the rimary role layed .y the U"/" 1ederal 0eserves fast and loose monetary olicy" Indeed the res ected $rofessor 2ohn B" Taylor, an ex ert on monetary economics, stated that =monetary excesses were the main cause of the .oom 5Taylor, )++;6" 0ather ironically it was the 1eds monetary olicy that was a central cause of the 7reat #e ression" Indeed rior to the colla se of the stoc! mar!et in 9;); the 1ederal 0eserve had =increased the money su )++;6" /uch an increase in money su ly eerily mirrors the ex ansive olicy of the 1ed in the years ly from 9;)9 through 9;)B .y around A+ ercent 5,is!anen,

.etween )++9 and )++A" Indeed for a sustained eriod .oth .efore 9;); and )++B the federal funds rate was .elow the general inflation rate and in .oth instances an asset .u..le followed" In 9;); it was a stoc! .u..le and *+ years later in )++B it was real estate .u..le" 3owever what rom ted the U"/" 1ederal 0eserve in the early )+++s to ta!e interest rates to such lows> 8ell the story goes as follows" It is well documented that the start of the twenty first century rovided a challenging macroeconomic environment for the mar!ets" Indeed following the rise and colla se of the internet .u..le from 9;;: until March )+++ stoc!s lummeted, investor confidence vanished and the mar!ets suffered a mild recession" In addition geo olitical tensions arising from the ;I99 attac!s, the conflict in IraF and the dislocations that followed the &nron scandal further heightened mar!et uncertainty" 1earing that the geo olitical tensions and mar!et tur.ulence would s ill into the real economy the U"/" 1ederal 0eserve made the move to lower the target federal funds rate H the interest rate at which .an!s lend to one another ( set .y the 1ederal ? en Mar!ets Committee" Thus fear rom ted the 1ed to drastically cut the target federal funds rate from A": ercent in late )+++ to 9"B: ercent in #ecem.er )++9, and down to 9 ercent .y 2une )++<, a record

17

low" Then in 2une )++G the 1ederal ? en Mar!ets Committee started to raise the target rate until it reached :"): ercent in 2une )++A 5Bernan!e, )+9+a6" Moreover it must .e recognised that the U"/" government had a strong influence over the 1eds monetary olicy as Congress ushed its afforda.le housing mandate" Indeed the 1ed found itself under sustained ressure from the government to maintain low interest rates, as will .e discussed later"

,nflation vs. FF -raph, %!'(').

In any case the most telling as ect of the target federal funds rate is that it directly im inges on consumer and mar!et confidence" Indeed interest rates are a central tool used to control economic activity and a rinci le tool of macroeconomic sta.ilisation and .y lowering or raising the target rate the 1ed can dictate the general am.iance of the mar!et lace and the direction of the economy" 3owever the 1eds laxity from )++9 to )++A ensured a rich vein of money su ly which

im inged heavily on the glo.al economy" Indeed 2ohn Thain the former C&? of Merrill Lynch was ex ressing o ular sentiment when he stated that =there was too much money availa.le for too long at too low a cost 5Thain, )++;6" By lowering the target rate so extensively and holding it low for so long the 1ed ensured that glo.al credit mar!ets were su le, liFuidity was am le and the consumer and the mar!et lace ":6" were ready for the ta!ing as they were rom ted to =.uy houses, which in turn raised house rices and led to a surge in housing investment 50a@an, )+9+,

18

The rise in housing demand was also a nota.le sym tom of the tech stoc! .u..le of )+++, for after the colla se =the flight to survival and rofits went into real estate 50ydstrom, undated6" Indeed housing starts @um ed to a =): year high .y the end of )++< and remained high until the shar decline .egan in early )++A 5Taylor, )++B6" The huge surge in housing demand ensured that there was an incredi.le inflation in real estate which encouraged further demand which caused an encore of rice hi!es and a deadly u ward s iral as = rice increases .eget further rice increases 5/hiller, )++:, "xvii6"

1ew can deny the re ercussions that stemmed from the overly ex ansive olicy of the 1ederal 0eserve and the fact that it was a =ma@or factor fueling the increase in housing rices rior to the onset of the current U"/" recession 5Lothian, )++;6" In any case the writing was on the wall for the glo.al economy when 0aghuram 0a@an 5)++:6 stated in his now infamous )++: a er, Has Financial .evelop/ent 0ade the 1orld iskier2 that = ersistent low interest rate can .e a source of significant distortions for the financial sector" Li!ewise 1riedrich 3aye! had long since written that increased money su ly and artificially chea credit is a reci e that ultimately ends in a .oom and .ust"

3owever it is Fuite unsettling to thin! that the actions ta!en .y the 1ederal 0eserve in )++9 in order to avoid a recession led to the creation of an asset .oom and .ust that far outstri ed that of the tech .u..le and its aftermath" Indeed 8illiam 1lec!enstein 5)++*, .u..le" Ultimately it turned out that the 1eds crisis averting and accommodative monetary olicy was nothing more than a form of sado(monetarism" "<6 stated that =7reens an .ailed out the worlds largest eFuity .u..le with the worlds largest real estate

i" European )onetary Policy

The creation of a single currency in &uro e in 9;;; unleashed an age of creativity in &uro e" Indeed the common currency heralded a move away from traditional stodgy .an!ing ractices and a move towards rofita.le investment .an!ing and the world of high finance as high financiers from London, $aris, 1ran!furt and &din.urg lin!ed u with ,ew -or! and other centres of international finance"

19

Most tellingly .y modernising finance &uro e aligned its economic and monetary olicies considera.ly with the hegemonic resence of %merica" Indeed the landsca e of low interest rates that reigned in %merica from )++9()++A was largely mirrored across the %tlantic as ten &uro ean Mem.er /tates egged themselves to a single monetary olicy from the .eginning of 9;;;" &!!ehard %" 4ohler and %ndreas 3offmann 5)+9+, ")<G6 o.served that the lowering of

interest rates was not localised to the U"/" .ut rather it was a glo.al henomenon and certainly as &uro e unveiled its common currency it followed that =&uro ean monetary olicy .ecame more closely allied with U"/" monetary olicy 5i.id"6 %nd whilst the &uro ean Central Ban! 5&CB6 serves under a single mandate to control inflation ( the 1ederal 0eserves role is to maintain rice sta.ility and control inflation ( &uro es central .an! allowed an asset .u..le to inflate that had no correlation to core economic fundamentals" Indeed @ust as ha ened in %merica from )++9 until )++A the &CB lowered real interest rates considera.ly and !e t them low for some time" In doing so the &CB and its monetary excesses allowed for housing in &uro e to inflate to scarily high levels" Indeed The &CBs loose monetary olicy hel ed $ortugal, Ireland, Italy, / ain and 7reece 5the $I7/6 and other arts of &uro e to go down a ath of self destruction" These countries were given access to chea funding which ultimately fuelled hugely damaging housing and construction .ooms" The &CB needed to show more restraint for the wea!er eri heral economies of &uro e who were li!e !ids in an all you can eat candy store" Ultimately the crisis in &uro e has shown again the im ortance of monetary olicy and that inaction on the art of central .an!s goes a long way to fuelling devastating asset .u..les"

ii" Glo8al

onetary policy

Moreover from the start of the )+++s central .an!s all across the glo.e in a seemingly concerted move lowered interest rates, causing a worldwide monetary ex ansion for which =real world interest rates remained near Cero for a long time after )++9 54ohler and 3offmann, )+9+, "))B6" Indeed it wasnt @ust the U"/" and &uro e that moved lending rates

20

close to CeroJ there was an =international conversion to accommodative monetary olicy 5i.id"6" In any case this sim ly confirms the glo.al hegemonic status and influence of %merican governance and economic olicy" It is a country that has a glo.al reach and when %merica moves the rest of the world reacts" Indeed the U"/" 1ederal 0eserve is =worlds central .an! in all .ut name 50a@an, )+9+, "))B6 and it is Fuite rightly the =most im ortant and least understood force sha ing the %merican H and glo.al H economy 57runwald, )++;6" Thus not only does the 1ed control the money su ly .y setting short(term interest rates that

sha es national levels of inflation, em loyment, the strength of the currency, the s ending ower of the individual and the outloo! of the economy, .ut it also directly sha es the olicies of foreign central .an!s" Indeed the lowering of interest rates and su.seFuent .oom in housing rices was not restricted to the U"/" and &uro e and indeed the real estate eu horia manifested itself in other nations around the glo.e" 0ather the glo.al .lan!et of low interest fuelled credit ex ansion across the world and a commensurate housing .u..le as =asset rices, articularly house rices, in nearly two doCen countries accordingly moved dramatically higher 57reens an, )+9+6" In articular 0o.ert /hiller 5)++:, "996 noted that was a glo.ally concerted increase in real

estate after )+++" ,ota.ly cities in %ustralia, Canada, China, 1rance, 3ong 4ong, Ireland, Italy, ,ew Kealand, ,orway, 0ussia, /outh %frica, / ain, the United 4ingdom and the United /tates 5Iceland also6 ex erienced housing .ooms" Moreover, researchers at the ?rganiCation for &conomic Coo eration and #evelo ment rovided evidence from that the greater the degree of monetary access in a country, the larger the housing .oom was 5Taylor, )++;6"

iii" -o9 !nterest ,ates &pur on )odern Financial Alche y

The low interest rates of the U"/" 1ederal 0eserve and of central .an!s around the world had another gravely ill effect" ,amely it ushed investors away from the traditional, rudent and

21

more ris!(averse techniFues of .an!ing and investment, away from eFuities and towards ris!y investments in search of yield, leverage and higher returns" Indeed =relatively low interest rates worldwide for much of the )+++s drove investors to see! higher yields 5#unaway, )++;6" 0aghuram 0a@an 5)+9+, "9+;6 echoed that statement when he stated that =low short(term interest rates ushed investors to ta!e more ris!" It ushed normally cautious and circums ect investors such as u.lic ension funds, mutual funds, la.our unions, insurance com anies and foreign investors towards ris!ier exotic instruments that offered yield enhancement and highly attractive returns, with seemingly little ris!" It was the great shift from eFuities to de.t investment, and more s ecifically the shift en masse towards high(yield and investment grade mortgage .onds" Indeed in order to satiate investors institutional investment managers, normally @udicious and conservative money handlers, .egan to lace their ortfolios and cash reserves in MB/s and C#?s, moving away from the traditional and rudent investment avenues such as U"/" treasuries, cor orate de.t, munici al .onds government .onds, investment grade commercial a er and the li!e" The distaste held .y U"/", foreign and &uro ean investors for the low returns to .e had from traditional vanilla investments of government .onds and cor orate de.t ensured that once rudent investors inadvertently too! on su. rime ac!ed mortgage .onds" Indeed it turned out that &uro ean and international investors who urchased %%% and investment grade fixed(income securities in reality .ought heavily into su. rime mortgage .ac!ed securities 5MB/s6 and credit default swa s 5C#?s6" In doing so they unwittingly tied themselves inextrica.ly to the fate of %merican su. rime homeowners and as a result suffered devastating losses"

i6" A &u

ation

The uns ea!a.le damage of the 7reat Crash has taught us a few hard lessons a.out monetary olicy that we must learn from" 1irstly, to revent future asset .u..les central .an!s need to wor! .y the adage that interest rates should .e elastic as o osed to uniform, in that they should undulate, meander and oscillate along the e.. and flow of the .usiness cycle" They need flexi.ility and ada ta.ility

22

as rescri.ed .y the Taylor 0ule which warns against the tendencies for interest rates to remain low and sta.le over a rolonged eriod" 3owever this goal was not exercised and as a result, the non(elastic and uniformly low interest rates that revailed during the early )+++s fuelled a !iller asset .u..le and mar!et hysteria" Thus it is necessary for central .an!s to continually assess asset rices and their correlation to inflation, core fundamentals and intervene where necessary" &xcess liFuidity re()++* was deadly and had central .an!s restricted money su ly earlier during the asset inflation the devastating highs of real estate would never have occurred" Indeed Ben Bernan!e 5)+9+, ")A6 did admit that =the 1ed could have sto ed the .u..le at

an earlier stage .y more aggressive interest rate increases" Certainly ,ouriel 0ou.ini 5)++:6 in his famous a er, 1hy Central &anks $hould &urst &u++les, advocated @ust such a method in order to com.at an asset .u..le" In any case we have learnt the hard way that low interest rates held low for a long eriod are dee ly damaging" Moreover &uro e has learnt the hard way that &uro ean monetary olicy is unsuited to the rigours of a multitude of diverse economies" Indeed =the &CB olicy was found to .e a ro riate or slightly restrictive for 1rance and 7ermany, .ut too loose for Ireland and / ain 5/eyfried, undated6" Ultimately it is rather easy to conclude that the influence that the U"/" central .an! holds on the mood of the glo.al economy is something that is hugely underestimated and in the end the actions and inactions of the 1ed .etween )++9 and )++A layed an integral role in reci itating and maintaining the U"/" and glo.al housing .u..le"

23

24

C/APTE, >5 &/.T 2: FE*E,A- /.'&!+G E=CE&&

*e ocratising Finance isnt all its Crac7ed up to 8e

3aving outlined the damaging role of low interest rates on the glo.al economy it is now a ro riate to consider another ma@or factor that hel ed to reci itate the 7reat Crash of )++* and in this instance we will consider the failings of the U"/" federal government" Indeed the financial crisis was one not only of mar!et failure as we will see later .ut one also of government failure"

Certainly the U"/ government was guilty of two ma@or financial crisis(inducing shortcomings that contri.uted massively to the 7reat Credit Crash of )++*"

1irstly, successive residential administrations sought to extend the %merican #ream .y ushing the .enefits of rivate homeownershi down mar!et" In ursuing the goal of ushing mortgages to the lower echelons of society the U"/" Congress forced the relaxation of traditionally rigid credit issuing standards and in doing so gave .irth to su. rime and %0M( mortgages 5ad@usta.le rate mortgages6 and in doing so institutionalised the su. rime mortgage mar!et"

/econdly, in an effort to ush home starts the U"/" government !e t a strong hand over the 1ederal 0eserves monetary olicy in order to ensure that the central .an! !e t interest rates low"

Both of these actions .y the U"/" federal government had the most unintended of conseFuences, ra idly distorting the economy and international financial mar!ets and as such it remains that government excess was one of the : deadly shots that came together to unleash a financial crisis of lanetary ro ortions"
25

i" ,educing -oan ,e?uire ents to Palliate the Poor

7rowing increasingly aware of the escalating ineFuality .oth in the standards of living and in the levels of income among %merican citiCens ( a serious fault line in the %merican economy H the U"/" Congress sought to extend credit to the less than credit worthy in an effort smooth out the dis arities and to ma!e the %merican #ream a reality for those on the .ottom rungs of society" 0aghuram 0a@an 5)+9+, "G)6 ertinently discerned that the government olicy that ushed for the ex ansion of credit lines to su. rime .orrowers ensured that credit ex ansion was to .e used as a = o ulist alliative" Li!ewise in similar tone 0o.ert 2" /hiller 5)++*, ")<6 o.served that the extension of credit to su. rime .orrowers was an attem t towards =democratising finance" Indeed the federal housing olicy that sought to alliate the oor .y democratising finance was first initiated in the early 9;;+s .y the Clinton administration and later carried on as 7eorge Bush too! office in the )+++s" 3oward Bloom 5)+9+, "<+6 was right to o.serve that ressed masses Clintons goal was =messianic, as it was a goal that sought to =lift 5the6 o %merica" Certainly 7eorge Bush had a rather ecclesiastical tone when he stated that =we can ut light where theres dar!ness, and ho e where theres des ondency in this country" %nd art of it is wor!ing together as a nation to encourage fol!s to own their own home 5Bush, )++)6" Thus in order to meet the hallowed goals of Clinton and Bush, .an!s soon found their arm wrenched .y a wave of legislation, an assortment of olicy measures and a num.er of community organisations that a lied heavy ressure in order that they lend to the oor" Certainly .an!s had .een accused for some time of red3lining, or in other words of sim ly having refused to lend to minorities and those in inner(city and low(income neigh.ourhoods" 3owever the divine intervention of successive residents ut an end to any such suggestions" Indeed the Community 0einvestment %ct of 9;BB 5C0%6 which was revised .y Bill Clinton in the early 9;;+s sti ulated that in order to o.tain a .an! charter from the federal

into the middle class and to give them a sta!e in the sta.ility of a vigorous, inventive

26

government .an!s had to lend to %frican %mericans, 3is anics and other minorities" It was thus a stic! used to .eat .an!s in order to drive u lending in neglected areas" %.ove all it was a way to get around %mericas historically and culturally rooted reticence towards ideas of taxation and redistri.ution" Certainly for the large art it leased #emocrats as it u ed social @ustice and leased some 0e u.licans who saw the .usiness and rofit as ect of the government rogram" % mix of .ig .usiness and social @ustice interests were thus merged in order to give the oor a taste of the %merican dream through .uying houses and starting .usinesses" 3owever the federal housing rogram which gave .irth to ad@usta.le rate mortgages 5%0Ms6 and su. rime loans hel ed to extend loans to eo le that should never have .een given access to credit" Indeed encouraged .y the government(loosened mortgage standards many hundreds of thousands of su. rime .orrowers too! on loans, and with the wide s read assum tion that house rices would rise indefinitely many more @oined them" Indeed =over a trillion dollars was channeled into the su. rime mortgage mar!et, which is com rised of the oorest and least credit worth .orrowers within the United /tates 50einhart and 0ogoff, )++*a6" 3owever the idea that real estate values would rise forever was a raw economic fallacy and once house rices .egan their decline in )++A, su. rime, %0M and ,I,2% 5no income, no @o. or assets6 .orrowers all defaulted on ayments en masse" This had the most severe re ercussions on high finance and international ca ital mar!ets" Thus due to the heavy involvement of government in urging the relaxation of loan standards and the creation of su. rime loans it is right to say that the su. rime crisis =lay right at the heart of the %merican olitical system"

ii" Go6ern ent Push for -o9 interest ,ates to 4ic7 &tart /ousing &tarts
%s a result of the federal housing olicy the low interest rates of the U"/" 1ederal 0eserve .etween )++9 and )++A had strong undertones of government intervention" Indeed such was the desire of the U"/" government for increased housing starts that = ressure 5was6 a lied all the time .y Congress 50a@an, )+9+, "9+*6"

27

8hilst the dis arities in the levels of U"/" income were hidden for a while under the world of low interest rates and reduced lending reFuirement as well as the smo!e and excitement of rising real estate, in the end the credit rise and colla se was a huge fault of the fanciful housing olicy and the governments meddling in the affairs of the 1ederal 0eserve"

iii" A &u

ation

%ttem ts to democratise finance and to alliate the oor in the U"/" .y ex anding credit to citiCens sitting on the eri hery of society is commenda.le .ut history tells a story that should warn against such economic olicies" %fter all it was the massive extension of credit .y rural .an!s in the 9;)+s to farmers cou led with other extraneous factors which contri.uted to the stoc! mar!et Crash of 9;);" Indeed .oth the 7reat #e ression of the 9;<+s and the 7reat 0ecession of )++*()++; have shown that = o ulist credit ex ansion went too far 50a@an, )+9+, "G<6 and in the case of mortgage issuance the U/ government has learnt a little late in the day that =homeownershi , for all its advantages, is not the ideal housing arrangement for all eo le in all circumstances 5/hiller, )++*, "A6" Certainly extending credit to the oor a eared a sim le and effective way to address the growing ineFuality" 3owever such activity caused ma@or distortions to the financial sector and in the end the U"/" found out that it was =an extremely costly way to redistri.ute 50a@an, )+9+, "G<6"

The federal housing olicy was one of good intentions yet it was utterly fanciful and =what started as a government effort to im rove the ros ects for home ownershi through a olicy of =easy money end5ed6 u having unintended conseFuences that will leave many %mericans economically scarred for the rest of their lives 5Thornton, undated6" %nd whilst it is right to say that =there are lenty of cul rits, it remains that the story the glo.al financial crisis was = artly one of Bushs and 5Clintons6 own ma!ing 5Bec!er et al", )++*6"

28

29

C/APTE, @5 &/.T >: C.+&')E, E=CE&& !rrational Exu8erance

30

To in the .lame for the financial crisis solely on the .ac!s of .an!ers, credit rating agencies or the li!e is not the correct res onse nor is it constructive" %s outlined earlier, such a res onse would .e too facile and indeed to ta!e such a stance would .e to =a.solve the rest of us of our res onsi.ility for reci itating the crisis 50a@an, )+9+, was =your greed and mine 5Bloom, )+9+, catastro he" Indeed the coming together of the financial crisis was a su.tle .ut deadly chemistry and the role of the consumer on Main /treet cannot .e under layed" %t the end of the day eo le decided to ta!e out credit cards and home loans, monumental household de.t was self( induced" ,o one was forced to ta!e on a mortgage or mortgages, credit cards or consumer finance" Consumers willfully consumed huge amounts of credit .efore the crisis and thus im licated themselves in the fall of glo.al finances most seriously" Main /treet was greedy too and the greed was good, while it lasted" Through their incessant consum tion, consumers rovided the foodstuffs that ro elled the activity on 8all /treet and of high finance" Indeed .y increasing their lia.ilities consumers raised ex onentially the flow of de.t and structured roducts that wiCCed throughout high finance" %nd at the end of the day 8all /treet could not have done what it did without the raw material needed for the rocess of modern alchemy ( the housing and de.t lia.ilities of consumers on Main /treet" 3owever what is it that drove consumers to ta!e on so much credit and to s end with such manic eu horia> %s was alluded to earlier, the consumer de.t .inge was in large art a sym tom of the low interest rates which made mortgages and the li!e so managea.le and attractive" It was also a henomenon that manifested itself as a result of the reduced loan and credit reFuirements than!s to a government housing olicy as well as the indifference of mortgage originators who were ushed on .y huge mortgage origination fees and the hunger of 8all /treet alchemists" "G6" %nd rightly so as it "<96 that contri.uted to the manic housing and

s ending eu horia" Ultimately consumers were art of a mor.id mix that caused a financial

3owever a central and erha s rimary cause underlying the incessant activity of consumers was the non(rational herding mentality that was driven .y nothing more the infectious mar!et

31

sychology of irrational e*u+erance H a term first coined .y %lan 7reens an in 9;;A and later a central focus of academic research for 0o.ert /hiller, an ex ert on consumer .ehaviour, asset .u..les and their causes"

0o.ert /hiller 5)++:,

")6 who has written voluminously on the matter of consumer

.ehaviour, mar!et sychology and their .outs of mar!et mania outlined that irrational e*u+erance =is the sychological .asis of a s eculative .u..le" I define a s eculative .u..le as a situation in which news of rice increases s urs investor enthusiasm, which s reads .y sychological contagion from erson to erson, in the rocess am lifying stories that might @ustify the rice increases and .ringing in larger and larger class of investors, who, des ite dou.ts a.out the real value of an investment, are drawn to its artly through the envy of others successes and artly through a gam.lers excitement"

Indeed in the early )+++s the media, rumour and social noise rom ted consumers to ta!e on an unyielding faith in the real estate mar!et" 0e orts of the dou.ling and tri ling in value of real stirred u consumers in a .out of investor enthusiasm and .elieving that house rices would grow indefinitely ( with few saying otherwise ( countless consumers .ought into the real estate mar!et with rec!less a.andon"

Certainly the glo.ally s read and manic s ending .inge was driven .y = sychological factors that 5had6 little to do with fundamentals 5Ba!er, )++B6 and as a result of the irrational exu.erance consumer demand ushed real estate rices far away from core economic indicators"

The wor! of 0o.ert /hiller which ex lores the non(rationality and herding .ehaviour of consumers is something that overla s rather fittingly with a new field that has emerged within the wider study of economics, namely that of sociono/ics ( a socio(economic theory that considers the social mood and how its im inges on economic activity"

32

Much has .een written within this nascent field of study, 5cf", ,ofsinger, )++9J ,ofsinger, )++:J ?lson, )++AJ $ar!er and $rechter, undated %J $ar!er and $rechter, undated BJ $rechter, 9;;;6 however time and s ace constraints ermit only a .rief consideration of this fresh and insightful as ect of modern academia"

,onetheless sociono/ic scholars hold that a social mood can .e transferred through social contact which can s read confidence or lac! thereof far and wide" %nd since the mood is collectively shared, and in a constant state of flux many sim ly follow the herd as individual consumers .ase their urchase and investment decisions on rumour and social noise, devoid for the large art of any sort of detailed !nowledge of the insider dynamics of investment and trading H a scenario of the free rider investor"

Indeed it was the case that =most homeowners did not care why residential real estate rices roseJ they assumed rices always rose, and they should sim ly en@oy their good fortune 50o.erts, )++*, " xvii6" %nd as the rices rose the social noise stirred an ever stronger u.lic interest and indeed as the =social mood reache5d6 its ea!, the level of o timism in society 5drew6 more eo le into investment 50edhead, )++*6 thus hel ing to feed the asset .u..le ever more"

/uch a scenario highlights how =emotion and erce tion are the core of economics 5Bloom, )+9+, ":)6 and in this instance the high rices were sustained only .y the raw emotions, osed to any confidence and erce tions of investors as well as a rimal enthusiasm as o

correlation to real value" Indeed all too often =humans have a chronic tendency to overconfidence 5Chancellor, )+996, and it remains that =errors of human @udgement can infect even the smartest eo le, than!s to overconfidence 5/hiller, )++:, "xv6"

Certainly the sychological contagion of irrational exu.erance crossed wide oceans and stirred an un.ounded confidence in the solidity of the housing mar!et even amongst the smartest and most mar!et savvy eo le" 3owever even though it =should have .een evident

33

to housing analysts that the housing mar!et was ex eriencing a .u..le 5Ba!er, )++B6, only a select few too! note"

It @ust goes to show in s ite of all the advances in technology and !nowledge, how something as com lex as the economy can .e .uilt u so high and .rought down so low .y something as sim le as the raw instinctive animal s irits of man and his desires" Indeed the economy is sha ed .y the actions or inactions and the emotions of consumers and investors in low finance and as such, if credit is the life.lood of the economy, it goes that consumers and their emotions are the ulse that can .oth set the economy .oth racing and lummeting"

Thus, much in the same way that man and other organic entities have a mood and an emotional state, the economy ( which is driven .y the totality of man and the consumer H can li!ewise reach moments of acute leasure or distress"

The end result was that the nature and character of household de.t changed fundamentally and throughout the early )+++s hy er leveraged household .alance sheets .ecame the norm" Indeed cou led with the erosion of traditional loan reFuirements ca ital s ilt over the rudential .an!ing levees and showered immense levels of credit over a wide and diverse ool of .orrowers who were all to willing to ta!e it on" The gra h .elow highlights the increasing inde.tedness of the consumer .etween )++< and )++: in articular"

34

Source: (Reidy et al., 2010).

Indeed the credit tsunami fed the investor enthusiasm and with an unyielding faith in asset( .ased ros erity the wave of credit allowed consumers to .uy their first, second, or even third house" 8ith the .elief that house rices would rise ad infinitum and with fungi.le mortgage de.t consumers could liFuidise their gains as rices rose or refinance their mortgage loans in order to urchase widescreen T's, s ortscars, holidays, .oats and innumera.le other luxury items" 3owever this way of life was .ut a mere mirage" %merican consumers on Main /treet were swimming in financial hu.ris, a financial fantasy land and an economic uto ia where house rices would never fall"

/uch a mentality fuelled .y irrational exu.erance led to significant under ricing of ris! and in the end the consumer and wider finance who had so long danced with fire got severely .urnt" Indeed as rices .egan to align to economic fundamentals consumers suddenly wo!e to find out that house rice a reciation was not an infinite rationality"

35

%nd as rices reverted to core fundamentals and house rices de reciated the world learnt that the same irrational exu.erance that fed the real estate .u..le could hel to deflate the economy in a most damaging manner"

Indeed consumer, investor and mar!et confidence or lac! thereof is the central tenet of the modern economy and financial mar!ets, and @ust as rice hi!es stir further rice hi!es in a rolling wave of investor confidence, so it remains that any ma@or negative rice fluctuations can cause mar!et actors to ta!e flight"

Indeed consumers and .an!s roc!ed the mar!et with fire sell liFuidations which drove down asset rices in a devastating downward economic s iral, .ringing to an end the credit(driven su er(cycle and unleashing a long and drawn out cycle of de.t deflation that has continued to this day"

The a.ove analysis of irrational e*u+erance lays .are the inefficiencies of man and the raw erfunctory emotion and rimal instincts of the consumer that sha e the mood and direction of the glo.al economy"

Thus the goal of this section was to highlight the wea!ness of man and their tendency to disregard traditional sensi.ilities when faced with the chance to access chea and easy credit" Indeed the greed was not limited to 8all /treet .ut rather was manifested on Main /treet and throughout society .oth from low and high finance"

36

C/APTE, $5 &/.T @: 0A-- &T,EET E=CE&&

An Exploration of )odern Alche y

37

The science .ehind mortgage .ac!ed securities 5MB/6, collateralised de.t o.ligations 5C#?s6 and credit default swa s 5C#/s6 is true modern day alchemy" It is a tene.rous techniFue that involves the financialisation and commodification of everything" Indeed modern financial alchemy has hel ed to transform static and illiFuid assets into commodities that can .e .ought and sold around the world" %nything from mortgage loans, commercial real estate loans, cor orate de.t, credit cards, student loans, car loans and the li!e are converted into trada.le goods in a world gri ed .y financialisation" 1or the ur oses of this section we will consider in detail these esoteric tools of high finance, the magna o era of )9st Century financial engineering, and in articular this a er will focus on the financialisation of homes and homeowners as it stands that =housing is a central as ect of financialisation 5%al.ers, )++*, "9G*6"

3owever the financialisation of housing and the com lex, o aFue and .affling ractices involved layed a central role in the 7reat Credit Crash of )++*" Indeed the world found out that 8all /treets .uying of credit default swa s and the trading of su. rime mortgage .onds and C#?s in the end did not distri.ute ris! as was originally intended, rather they disseminated the toxicity of su. rime de.t, industry mal ractice and the foi.les of man worldwide" Thus for the ur oses of com leteness it is necessary to dive into the dar! world of )9st Century financial engineering"

i" )ortgage (ac7ed &ecurities ;)(&s<

The ractice of selling and trading de.t is hardly new" Indeed the trading of .onds is a ractice many hundreds years old that has aid for wars and .an!rolled governments the world over" It was after all =securitisation that aid for the warshi s that allowed Britannia to rule the waves 5Braithwaite, )++:6" % rocess that was first invented in ,a les, Italy in the 9Bth Century 5i.id"6, the contem orary science .ehind mortgage .onds has changed little" In any case the securitisation of mortgages .ears witness to the liFuidation of once long(term, illiFuid and .alance sheet clogging lia.ilities into trada.le assets" By removing the default ris! off .alance sheets, remodelling loan .oo!s and ta ing into the underlying value of housing loans the modern mortgage securitisation rocess has revolutionised modern finance"

38

Indeed the develo ment of modern mortgage securitisation, the esta.lishment of the secondary mortgage mar!et and the emergence of a non(exhaustive nomenclature of exotic financial innovations which have develo ed around the rocess of modern alchemy has irrefuta.ly signalled the .irth of =new ca italism 51inch, )++;, "9;6" 3owever .efore the advent of =new ca italism the mortgage .usiness was entirely different" Indeed .an!s funded their housing .usiness through lending out customer de osits at interest, retaining the original mortgages and receiving the monthly cash flow of re ayments and interest" This rocess was !nown as the =originate to hold model and an all together sim ler .usiness from modern mortgage lending" %s a result of retaining the original mortgage loans on their .oo!s the traditional lenders also retained the ris! of default and conseFuently they were astute ar.iters and managers of ris!"

3owever the traditional =originate to hold model of mortgage lending started to .e dis laced .y the =originate to distri.ute model as rimitive forms of mortgage securities were develo ed in the 9;B+s when .an!s .egan selling off single mortgage loans to outside investors in a roduct !nown as =mortgage( ass(through securities" Much of the early .usiness was carried out .y 1annie Mae and 1reddie Mac, the now infamous government s onsored enter rises 57/&s6" These agencies had an im licit government guarantees and generally adhered to strict underwriting standards, and as a result their roducts carried high credit ratings"

Indeed they roduced attractive and rofita.le roducts that allowed third arties to invest in the mortgage .usiness without the need to engage in the time consuming rocess of scrutinising details and assessing default ris! in order to originate loans" More im ortantly this new secondary mortgage mar!et rovided an invalua.le source of mortgage and consumer finance and when exercised ro erly it rovided an im ortant tool for ris! management"

But what exactly is a mortgage securityI.ond and how does it come into .eing> 1irst of all as mentioned earlier a .ond or securitised de.t roduct can come in any form" Indeed it matters

39

not the nature of the rimary underlying asset" The sole concern is whether a redicta.le cash flow can .e extra olated from the re(existing lia.ility in order to .ac!IsecuritiCeI collateralise the original asset through the maintenance of regular re ayment from the .orrower to the .ond holder"

Indeed a .ond is a contract where.y the investor will hold that, =I, the .ond investor, art with my money now" -ou, the .orrower, ledge that in return for receiving my funds now, you will ma!e s ecified, scheduled ayments to me in the future 5/ylla, )++96"

Mortgage .orrowers ma!e regular monthly re ayments and it is for that reason that mortgages are attractive and effective munition to su.@ect to the financialisation rocess of modern alchemy" Indeed following the financialisation and securitisation of a mortgage loan the monthly re ayments are then directed not to the mortgage originator .ut rather distri.uted 5=originate to distri.ute6 to the investor who .ought the securitised mortgage roduct"

The investors who .uy de.t roducts are thus called .ond holders" They receive romissory notes that state their entitlement to receive a regular cash flow in the form of interest ayments and rinci le amounts loaned at maturity channelled from the original mortgage .orrower" The diagram .elow gives a com etent ex lanation of the mortgage securitisation rocess"

40

$ource: $upre/e Court of the $tate of 4ew 5ork representative#s +riefing in the case6 7llstate ,nsurance Co/pany v. 0errill Lynch %!'(().

3owever in the late 9;;+s and early )+++s the mortgage securitisation .usiness soared amongst investment and shadow .an!s on 8all /treet who .ought into the =originate to distri.ute model with rec!less a.andon" Indeed the .an!s on 8all /treet who structured and issued .onds with great efficiency ensured that mortgage securitisation Fuic!ly .ecame a routine as ect of modern finance"

0esultantly a techniFue that started out in life as a rather modest cottage industry in the 9;B+s and 9;*+s, mortgage securitiCation was su.@ected to the full rigours of 8all /treet as it was transformed into a multinational .usiness carried out on an industrial scale"

Moreover the once rather sim le chemistry .ehind mortgage securities evolved into a vastly more com licated science with techniFues that involved the ooling of huge Fuantities of de.t lia.ilities into ac!ages that created a range of assorted de.t roducts" These were the new so histicated tools of high finance, !nown as collateralised de.t o.ligations"

41

ii" Collateralised *e8t .8ligations ;C*.s<

% Collateralised #e.t ?.ligation is sim ly the science of mortgage .ac!ed securities on steroids, of financialisation and modern alchemy on overdrive" It involves the ooling of an assortment of de.t lia.ilities which are then divided into slices and tranches of de.t that each carry a uniFue ris! rofile" Indeed C#?s can .e made u of a rain.ow selection of illiFuid assets ( mortgage de.t of the rime and su. rime variety, student loans, credit card loans, cor orate and commercial loans, auto loans and even de.t .onds can all .e .unched together within a C#? ortfolio"

Thus the rinci le difference .etween a mortgage .ac!ed security and a C#? is that a C#? is a melting ot of de.t, a giant ool of illiFuid assets"

The construction of a C#? contract usually reFuires the involvement of a s ecial ur ose vehicle 5/$'6 which includes assets, lia.ilities and a manager res onsi.le for issuing notes to institutional investors" The notes issued .y the /$' are the o.ligations of the C#? which entitles the note holder to regular ayment from a tranche of their selection"

The financial engineering of funnelling the cash flow or income from the assorted ool of de.t into a wide range of tranches rovides a multifarious menu of ris! which caters to the demands and diverse ris! a etites of the modern so histicated institutional investor"

The senior tranches have .etter credit ratings and as such the .uyers of highly rated C#? tranches are entitled to the first round of the availa.le C#? cash" Conversely the lower tranches of a C#? ortfolio have a higher otential yield .ut are far ris!ier assets" Indeed it is the tiering or water falling of the cash flow that thus see!s to rotect those investors who have ta!en on senior and more highly rated tranches"

This form of structured credit was first issued in 9;*B and soon after 8all /treet found out that s onsoring a C#? and selling de.t assets from a .road ortfolio of ris! was a highly
42

rofita.le .usiness" Indeed de.ts of all !ind were routinely secured in the =*+s, =;+s and early )+++s" 3owever as the U"/" housing .u..le inflated it .ecame increasingly a arent that housing de.t was the collateral of choice for financiers stoc!ing u a C#? ortfolio"

Indeed as the housing .u..le continued its u ward s iral su. rime MB/, %0M 5ad@usta.le rate mortgages6 and %lt(% 5 oorly documented loans6 mortgages increasingly made u the collateral held in the C#? ool of assets" In fact the issuance of residential MB/ C#?s roughly =tri led over the eriod from )++: to )++B and 0MB/ C#? ortfolios .ecame increasingly concentrated in su. rime residential MB/s 5$etersen et al", )+996" Moreover statistics com iled .y Bernstein 0esearch 5)+99, "B6 has shown that the annual

issuance volume of C#?s rose from E<< .illion in 9;;; to E)); .illion in )++A" The growth in the C#? issuance volume rovided an estimated E<A9 .illion in new ca ital to the mortgage mar!et and more im ortantly gave a su osedly ermanent home for the su. rime and %lt(% loans .eing originated and ac!aged .y financial institutions" Indeed the short(sightedness and hu.ris of .an!ers and financial engineers drove them to forge C#? contracts whose very structural foundations were assem.led u on su. rime loans which rested on the a.ility of oorly or non(documented su. rime .orrowers to maintain ayment, a most unli!ely scenario"

If the underlying de.t lia.ilities ac!aged within a C#? go un aid in large num.ers the entire integrity of the structured finance vehicle can colla se" 1urthermore if C#? contracts colla se en masse the very solvency of the .uyers of C#?s and the integrity of the .uyer( seller networ! can .e .rought into Fuestion"

iii" A (oo

in )odern Alche y Pushes &u8pri e -ending

The =originate to distri.ute securitisation rocess advanced wildly .eyond its rimitive roots into a com lex and convoluted .east that radically altered the economic incentives of

43

mortgage lenders and fundamentally war ed the world wider finance" Indeed the desire of high financiers for housing de.t in order to financialise ushed .an!ers to further loosen loan reFuirements"

3owever there were negative side effects of the most severe degree to .e ex erienced from the financial wiCardry that fused su. rime mortgages with ram ant financial engineering"

1or centuries .an!s and mortgage lenders had .een astute assessors and ar.iters of ris!, .astions of sensi.le money lending" 3owever the financial engineering of mortgages had seemingly made the longstanding issue of default ris! defunct, infecting mortgage originators and 8all /treet with an insatia.le a etite for mortgages of any !ind to financialise and ass onto end(investors"

Indeed since the original lenders were no longer reFuired to hold home loans to maturity they could Fuic!ly devoid themselves of the .urdens and worries that a .orrower would default" In the new rocess of mortgage lending the original lender would originate the loan, ta!e a commission fee then ass on the loan and in doing so ass on the default ris!" Thus the creditworthiness of the .orrower soon .ecame irrelevant as in the event of default it would .e a matter for the investor"

It .ecame standard ractice that for as long as loans could .e Fuic!ly =dum ed in the secondary mortgage mar!et, mortgage issuers had little concern a.out the a.ility of .orrowers to actually ay off their loans 5Ba!er, )++B6"

%s such the high servicing fees and an incessant demand for structured de.t roducts ignited a arallel .oom in the secondary mortgage mar!et alongside the housing .oom in the real economy" Indeed the extension of mortgages sim ly could not !ee u with investor demand which further rom ted myo ic .an!ers to extend loans to the less than creditworthy"

44

It was .ecoming o.vious that the mortgage .usiness had develo ed into an =assem.ly(line affair 5Tett, )+9+, "99)6" % non(sto roduction line as loans were extended to retail customers and Fuic!ly ac!aged into .undles of mortgages, la.elled %%% and immediately sold to ension funds, mutual funds, insurance com anies, la.our unions, foreign investors and foreign .an!s worldwide"

The demand for .oth mortgages and mortgage .onds ensured that retail .orrowers and real estate loans of any !ind were to .ecome =feedstoc! 5Caul!in et al", )+9+, fodder 5Tett, )++;, "B6 and =fertile "9996 to mortgage lenders and the financial wiCardry of investment

.an!s" Indeed it was .ecoming clear that mortgage mar!ets were no longer strictly a =facilitating mar!et for needy homeowners .ut rather a mar!et that was =increasingly feeding glo.al investment 5%al.ers, )++*, "9G*6"

In the end it was the war ed incentives of mortgage lenders and those on 8all /treet com.ined with a federal housing olicy and the wides read .elief in the =near economic im ossi.ility 5/tiglitC, )+9+, "*A6 that house rices would intermina.ly rise which led to the com lete erosion of sensi.le lending ractices and the normalisation of su. rime loans"

Indeed with the a.andonment of the customary ritual of ris! assessment rior to the issuance of credit it was ensured that mortgages would .e made availa.le to anyone and everyone" %nd even though the underlying de.tors were unli!ely to ma!e re ayment 8all /treet was still ready to financialise the raw material in order to feed the mar!et demand and .y )++: there was EA): .illion in su. rime mortgage loans and E:+B .illion of which found its way into mortgage .onds 5Lewis, )++*6"

3owever Michael Lewis 5i.id"6 was very much right to state that such loans were .uilt to =self destruct"

45

Indeed in the end it turned out that underlying the faLade of a vast glo.al networ! of MB/ and C#? contracts was a mar!et lace awash with toxic su. rime de.t, a tic!ing time .om. stra ed to the heart of glo.al finances"

By 1e.ruary )++B the < ma@or credit rating agencies .egan to downgrade many MB/s and C#?s from %%% to BBB and .y the summer of )++B the financial em eror was shown to .e wearing no clothes as the su. rime crisis unleashed itself onto the world through a andemic of defaults on the underlying mortgages" It truly illustrated to the world that the chemistry of financialising su. rime loans was a lethal ractice" But how could the su. rime lending of U"/" institutions affect .an!s in foreign nations right across the glo.e> Quite sim ly the financial wiCardry of modern alchemy 5through the hel of credit rating agencies, as one will see later in the a er6 transformed su. rime housing de.t into highly rated structured finance roducts that foreign .an!s, investors, ension funds and central .an!s were very willing to invest in" Indeed 7illian Tett 5)+9+, )++;, "99A6" "99A6 stated that =some %merican .an!s rivately guessed that at

least half of su. rime(lin!ed C#?s were .eing sold not to %mericans, .ut into &uro e 5Tett,

0ather than diversifying and s reading the ris! of default high finance had in the end sim ly ex orted the horrors of su. rime lending to =most of the worlds economies, 5and6 none more so than 8estern &uro e 5#atamonitor, )++*6"

i6" Credit *efault &9aps ;C*&s<

3aving ro.ed into the contem orary world of mortgage .onds and the inextrica.ly lin!ed cosmos of collateralised de.t o.ligations it is now fitting to consider the science of financial derivatives and more s ecifically that of credit default swa s"

Interestingly enough the science .ehind credit derivatives and C#/s is one that can trace its rimitive roots far .eyond those of de.t and mortgage .onds" Indeed derivatives are as old as
46

finance itself and have .een em loyed for thousands of years in order to limit ris! as =rudimentary exam les of futures and o tions contracts have .een found on clay ta.lets from Meso otamia dating from 9B:+ BC 5Tett, )++;, "996"

/o what are derivatives exactly> Most sim ly a derivative contract is an agreement whose value derives from an underlying varia.le and a tool that allows investors to shield or hedge themselves from the ris! of negative rices fluctuations or even to ma!e wagers that may ay off in the event of a future ositive rice swing"

Indeed derivatives have allowed financiers not only to hedge against ris!s .ut also to gam.le on the turnout of any num.er of mar!et events including the rise or fall of oil rices, the erformance of foreign currencies as well as stoc!s and shares, interest rates, the solvency of a com any and even weather activity" The turnout of any given .et sim ly de ends on the .ehaviour of the underlying .enchmar!"

It is erha s .est to give a wor!a.le exam le" /ay for instance that on a given day that the ound(to(euro exchange rate is such that one British ound .uys M9"<+" 8ell someone who is going to 1rance for a few months in a years time is worried that .y then the exchange rate 5the .enchmar!6 will have swung wildly out of his favor" 3owever a derivative contract could hedge the .uyer of the contract from an unfavora.le fluctuation in the exchange rateI.enchmar!" Indeed that erson could .uy a derivative contract that would ensure that he could still .uy euros at the rate of N9 to M9"<+ @ust .efore his tri , thus rendering the .enchmar! constant and unchangea.le"

The .uyer sim ly urchases an agreement with a .an! sti ulating that he can ma!e a ound( to(euro exchange of N9+++ with a .an! in 9) months time in which the .uyer is guaranteed to M9<++ regardless of what the actual exchange rate is in a years time"

47

% derivative agreement that sti ulates that the a.ove agreement had to ha en is called a future" /uch an agreement loc!s the .uyer into a contract to urchase euros at the re( s ecified exchange rate" 3owever a derivative contract could .e structured in another way such that the .uyer could agree to ay an extra fee of around N<+ which would give him the option to either ma!e the exchange at M9"<+ or in the case that the .enchmar! .ecame more favora.le he would not have to exercise the exchange rate transfer at M9"<+ .ut rather go with the more favora.le one"

1or a long time futures and o tions have .een traded on agricultural commodities in which grain farmers would for exam le .uy a future derivative contract in order to loc! in at a good rice to hedge against the chance that a .ig cro would .ring in low rices" This would leave s eculators to ta!e on the losses in the event that a .um er cro drove rices down" %t the same time if the cro was oor and rices were driven far .eyond that of what the farmer ex ected, the s eculators could hit a .ig ay day" By the 9;B+s derivatives @um ed from the realm of commodities and into the world of finance" 3owever credit default swa s as we !now them today were not invented until the mid(9;;+s" It was Bill #emcha!, his .oss $eter 3ancoc!, the illustrious Blythe Masters and a small grou of .an!ers at 2"$"Morgan, ins ired .y the chaos of the %sian financial crisis of 9;;B, who were res onsi.le for the creation of a roduct designed to shield .an!ing against the trou.les of .ad loans" Indeed the high financiers and financial wiCards at 2"$" Morgan had =decided they could defeat the .an!ers oldest foe H the danger that .orrowers will not re ay their loans 5Barrett, )++;6" /o what exactly are credit default swa s> 8ell a C#/ is sim ly a )9st Century derivative that often finds its value derived from an underlying asset such as a mortgage .ond or another form of de.t lia.ility as o osed to an agricultural commodity li!e wheat or an exchange rate as outlined in the earlier exam le" Indeed not dissimilar from the exchange rate exam le a.ove, a C#/ contract is an agreement chartered .etween two arties in which one .uys ris!Icredit rotection from the other"

48

0ather a ro riately it has .een said many times that credit default swa s are com lex financial instruments whose rimary ur ose is to insure .ond holders against the ris! of default" Indeed that is why it has .een uttered countless times that a C#/ is a form of de.t security or .ond insurance" %n insurance olicy that covers credit ris! .y aying out in the event of default much li!e an insurance deal ta!en out on a house or a car will cover any losses in the event of damage or loss"

Indeed a credit default swa is a contract held .etween two arties in which the seller agrees to com ensate the .uyer if a .ond issuer defaults on his or her lia.ility" It is a form of structured finance that can .e used to divert the credit ris! .orne .y the investor 5the rotection .uyer6 to another arty who is willing and ready to ta!e on that ris! 5the rotection seller6"

Used sensi.ly, a derivative can rovide a hedge against ris!" 1or exam le, Ban! % 5 rotection .uyer6 who is worried a.out some of the .onds that it holds on its .oo!s can ma!e a derivative deal to ay a fee to Ban! B 5 rotection seller6 in exchange for Ban! Bs romise to com ensate Ban! % if the .ond issuer defaults" By .uying the credit rotection Ban! % can rid itself of the worry and uncertainty related to the .onds that its holds and thus free itself u to ta!e on fresh de.t lia.ilities and to ma!e further loans" Ban! B while assuming some of the ris! can immediately en@oy the fee income from the insurance remium" Ban!s on 8all /treet and around the world saw the ris! dis ersion otential and it soon .ecame a household roduct" Indeed hedge funds, investment .an!s and insurance com anies all .ought into the idea of .ond insurance, .uying and selling credit default swa s in contracts that s anned the glo.e" %I7 however was the worlds .iggest insurance com any and largest issuer of C#/ contracts and .efore the crash %I7 was the go to man for C#/ contracts, selling .ond insurance .y the lorry load to the modern alchemy factories on 8all /treet who were mass roducing exotic su. rime structured financial roducts"
49

3owever it was the fusing of .ond insurance with su. rime MB/ and C#?s that .rought the financial world ever closer together, tied together in a world wide and systemic we. of credit and insurance agreements" %I7s credit default swa ortfolio stood at E:9B .illion according to a regulatory filing, of

which the giant insurance firm wrote some EB; .illion in insurance on C#?s .ac!ed mainly .y su. rime mortgages 57oldstein, )++*6" Indeed %I7 had sold swa contracts and made o.ligations to investors across the glo.e and =of the EGG9 .illion in credit default swa s that %I7 listed at midyear, more than three(Fuarters were held .y &uro ean .an!s 5%ndrews et al", )++*6" Moreover since the fact that C#/s are traded rivately .y insurance com anies, hedge funds and investment .an!s as o osed to .eing orchestrated over a centralised u.lic exchange, financial institutions were .asically allowed to get u to, .uy and sell and stri!e whatever deals they felt li!e" Indeed the Commodity 1utures ModerniCation %ct of )+++ had ensured that derivatives would remain unregulated and to .e traded as over the counter derivatives 5?TC6, a term that is now largely seen as a .yword for o acity and counter arty ris!" The lac! of oversight allowed investment .an!s and hedge funds to ta!e out C#/ contracts in order to ta!e wild .ets on the erformance of the underlying .enchmar!" They were even ta!ing out C#/ contracts in order to short and distort the mar!et" Indeed many mar!et actors were ac!aging su. rime de.t, selling the roduct onto trusting investors and then .etting that the very roduct they had @ust assem.led would default .y .uying a C#/ contract on the aforementioned deal" %nd as the su. rime mortgage mar!et unravelled it rendered su. rime MB/s and C#?s worthless, ruining the .an!s and investors who had .ought the su. rime MB/ and C#?s .ut aying off handsomely for those who had .ought the .ond insurance" Ultimately the colla se of the su. rime mortgage mar!et rom ted investors all around the world to call on their insurer, which for all too many was %I7" The ram ant demand for %I7 to ma!e good on its credit default o.ligations triggered the insurer to .e forced to either o.tain emergency liFuidity su ort or face .an!ru tcy"

50

In the end it turned out that credit default swa s which with the one hand can control ris!, can with the other if used irres onsi.ly and excessively, ex onentially am lify ris!" Indeed Blythe Masters 5)++*a6 who is lauded as the curator of modern C#/s stated that =tools that transfer ris! can also increase systemic ris! if ma@or counter arties fail to manage their ex osures ro erly"

6" The Excesses of the Financial 0ild 0est

The financial alchemists were modern day cow.oys, ioneers, colonisers and s eculators ushing the .oundaries of technology and modern finance" They were crossing into unchartered lains and into a arallel world of finance riding high u on technological advances on the crest of a waveJ it was a true modern day gold rush"

3owever as we saw in the section a.ove, financial alchemists were hel ing to sell %%% rated de.t all around the world" 3owever the investment grade roducts was de.t that was in reality worthless de.t" It was su. rime de.t .uffed u and ut in a fancy dress and go..led u .y large and ris!(averse institutional investors"

Indeed 8all /treet was straddling a wave that was .uilt on su. rime structured finance and in the end that wave colla sed as their ram ant use of chicanery .rought the world to the .rin! of economic %rmageddon"

It is a ro riate in this section to consider some of the worst ractices indulged in .y those .an!s on 8all /treet and the wider shadow .an!ing networ!"

The .and of /hadow .an!s were hedge funds, rivate eFuity funds, structured investment vehicles and conduits, money mar!et funds, .ro!er(dealers and non(.an! mortgage lenders"

51

But they were also the well !nown institutions li!e 7oldman /achs, Morgan /tanley, Merrill Lynch, Lehman Brothers, Bear /tearns and other investment .an!s"

These .an!s had long a.andoned the traditional techniFues of .an!ing, instead funding their daily activities through the ractices of modern alchemy and thus the unregulated creation, servicing and trading of a lethora of exotic financial instruments that included mortgage .onds, asset(.ac!ed securities, C#?s and C#/s"

3owever with hindsight it has .ecome rather clear that such ractices had turned glo.al ca ital mar!ets and high finance into a =great .ig national H and not @ust national, glo.al ( $onCi scheme 58olf, )+9+6"

The incessant com etition and the unrelenting ursuit of rofits and shareholder value ushed 8all /treet and shadow .an!s to ush the legal limits of finance and to wildly distort any sense of fair lay on the mar!et lace" 7oldman /achs was erha s the em.odiment of all the worst that 8all /treet excess and tric!ery had to offer and it is erha s a ro riate to consider some of their actions"

Indeed the Fuestiona.le and immoral ractices of 7oldman /achs had turned the .an! into =nothing more than a .ig hedge fund 5Cohan, )++;, ")*)6 and such was the readiness of 7oldman /achs to go against the interests of clients, shareholders, the mar!et and glo.al economic sta.ility in order to attain year(end rofits that the firm had come to .e seen as the =devil incarnate 5Bernstein 0esearch, )+996"

Traders in the mortgage .etting rooms of 7oldman /achs went against their very own customers .y wagering that the worthless securities that they had @ust .undled together and sold on would fail .y ta!ing large short ositions on those transactions" Indeed in )++A and )++B 7oldman churned out more than EG+ .illion in securities .ac!ed .y at least )++,+++ ris!y home mortgages, .ut never told the investors that it was secretly .etting that a shar
52

dro in U"/" housing rices would corru t the value of those very securities 57ordon, )++;6" In fact in the end 7oldman made even more money than they antici ated from this ractice as the value of the @un! mortgages fell further than they had ex ected"

7oldman /achs .ought into the worst that su. rime lending had to offer, .ut then through dece tion and raw deceit rid itself of its toxic assets .efore the su. rime crash, and in doing so ex loited customers and clients around the world and more im ortantly ex orted their evils and systemic ris! worldwide"

The extent of 7oldman /achs corru tion, deviousness and criminality was ex osed .y the hearing held .y the /enate $ermanent /u.committee on Investigations on % ril )Bth )+9+ when /enator Carl Levin = ulled out document after document which demonstrated the systemic, sleaCy criminality of the investment .an! 5/ annaus, )+9+, ")A6"

Indeed /enator Carl Levin 5)+9+6 cross(examined a num.er of 7oldman executives ma!ing reference to a num.er of internal emails made .y 7oldman traders that im licated them most seriously in this arallel underworld of criminality" /enator Levin unveiled the raw malfeasance of 7oldman traders when he Fuoted a statement an email of a 7oldman trader in relation to a C#? deal in which the trader was recorded as having said, =oh .oy what a shitty deal" 3owever such devious activity was not limited solely to 7oldman .ut rather was somewhat ty ical of all that 8all /treet excess had to offer" Indeed the ingrained culture of excess on 8all /treet cou led with almost unrestrained freedom had turned %merica and its networ! of shadow .an!s into the =Bernie Madoff of economies 54rugman, )++;6"

6i" A &u

ation

The use of the term alchemy is a most fitting analogy" Indeed it refers to a ractice carried out in the Middle %ges when =alchemists attem ted to transform .ase metals into gold 5/tiglitC, )+9+,6 and .efore the 7reat Crash and .efore the financial em eror was shown to .e wearing

53

no clothes, 8all /treet and the rating agencies had =found the formula for turning lead into synthetic gold 5/inn, )+9+, "9);6"

Indeed the modern rocess of financial alchemy and financialisation had seemingly allowed financial alchemists to ac!age su. rime mortgages into financial gold, transforming .elow investment grade often worthless assets into tri le(% rated lia.ilities as safe as secure as U"/" Treasury .onds"

-et des ite the a.undance of highly educated minds on 8all /treet its stands that many seemingly forgotten that =lending money to eo le who ro.a.ly wont ay it .ac! isnt good .usiness" If you wra crummy loans in a clever ac!age, theyre crummy loans 54elly, )++*6"

3owever as we conclude it is a ro riate to note that modern financial alchemy remains a source of huge otential to the glo.al economy" Indeed if used correctly it remains steadfast that the securitisation of de.t lia.ilities has long .een =a ositive develo ment for the resilience of the financial system .y ena.ling the dis ersion of credit ris! 53yun /ong /hin, )++;, "<996"

The structuring and trading of MB/, C#?s and C#/s exercised res onsi.ly can .e a fantastic form of .alance sheet management which can .ring a.out far reaching .enefits to finance and wider society" Indeed =credit default swa s and derivatives are not in themselves a .ad thingO" ro erly used and understood, they can .e immensely hel ful 5Blair, )+9+, "AA*6"

%lan 7reens an 5)++*a6 who ac!nowledged the wealth creating and ris! dis ersion .enefits of modern alchemy was right to recognise however that it was a financial science that was wholly =a.used in its su. rime a lications"

54

Indeed the excesses .y 8all /treet ty es ensured the fulfilment of 8arren Buffets 5)++)6 remonition that credit derivatives were =financial wea ons of mass destruction" %s a result of the crisis it has .ecome rather clear that any ideas held that humans are altruistic .y nature is a raw fallacy" The ram ant deceit on 8all /treet is a sym tom of a game without rules or oversight and a game that ays for few and hits many hard" Certainly the treachery on 8all /treet has merely confirmed that what 2ohn %" List 5)++G6 outlined in his a er 8he &ehaviouralist 0eets the 0arket: 0easuring $ocial Preferences and eputation Effects in 7ctual 8ransactions, in which he laid out an argument to dis el a long standing theory that humans were altruistic in nature" In any case the du licity and tric!ery on 8all /treet unveiled a dog eat dog world in which very few eo le will not screw one another over in order to reach the to " Thus the ur ose of this section was to outline in detail the science .ehind the tools of modern finance, recogniCing the .enefits of the science .ut ultimately see!ing to unveil the raw deceit as high financiers and financial alchemists a.used their ositions in the articulation of these tools and in doing so hel ed to .ring together one of the deadly shots that .rought the glo.al economy to the .rin! of colla se"

55

"

C/APTE, %5 &/.T $: C,E*!T ,AT!+G AGE+C!E& A

Co pleting the Process of )odern Alche y

56

&ven though ca ital mar!ets have .een around for the last <++ or so years and have .een glo.al for nearly )++, credit rating agencies and the industry of rating de.t securities has only existed since the early years of the )+th Century" Indeed 2ohn Moody, the founding father of Moodys Investors /ervice was the first to offer inde endent credit analysis, assigning letter grades to u.licly traded securities so that investors could .etter understand investment o ortunities as well as the strength and a.ility of securities to u hold steady ayment"

In the very first instance in 9;+; 2ohn Moody assigned letter grades to railroad .onds, mar!ing the =.eginning of one of the most owerful forces in modern ca italism 54iviat, )++;6" ?nly a few years later in 9;9A, /tandard and $oors entered the credit rating .usiness and in 9;)G 1itch 7rou Inc" was set u " By the 9;<+s they had .egun to determine the credit ris! of .an!s holdings, as well as engaging in international financial research in order to rovide credit ratings of commercial, governmental and sovereign de.t" /tandard and $oors downgrade of the U"/" credit rating and the stri ing it of its coveted %%% rating in %ugust )+99 only goes to show the raw im act that these institutions have on sha ing the mood and direction of glo.al finances" 8hen they s ea! investors, nations and stoc! mar!ets listen" Indeed they are = owerful organisations that can damage countries economies and wrea! havoc in the mar!ets with the stro!e of a en 5,eate, )+996" Thus credit rating agencies lay a fundamental role in the modern glo.al economy" Indeed charged with the res onsi.ility of roviding o.@ective and inde endent third arty analysis of the credit worthiness of issuers and a credit evaluation of their financial instruments they are central actors in modern finance" &ach day the mar!et turns to them in total faith as the ultimate ar.iters of credit ris! and as the measurers of good, .ad and indifferent" Moving a tri le(% grade .y even one or two oints can unleash a wave of investor fright which can have huge and unintended conseFuences on the wider economy" Unfortunately it is unFuestiona.le that the =.ig three credit rating agencies ( /tandard P $oors, Moodys and 1itch H and their mani ulation of credit ratings in the early )+++s had the most unintended and devastating conseFuences on the glo.al economy" Indeed they were central cogs to the mechanics of modern financial alchemy that seemingly lauded the excess on 8all /treet, hel ing to sustain a deadly housing .u..le"

57

%s a result it is largely acce ted that the rating agencies and their grossly inflated credit ratings were =dramatis ersonae in the unfolding drama of the 7reat Crash and the financial crisis 52estaedt and $ollard, )+9+, "<:96"

%nd even though it was the investment .an!s on 8all /treet who underwrote and stoc! iled MB/ and C#? tranches with su. rime de.t, ultimately it was the credit rating agencies that made the stin!ing roducts mar!eta.le than!s to their grossly inflated ratings" Indeed it was a tag team and collusive rocess where.y the investment .an!s structured the @un! roducts and then the rating agencies =tarted u the .onds 50itholtC, )++;6 .y la.elling the gar.age with %%% and other investment grade credit ratings" The credit rating agencies were the end machine at the end of the asse/+ly3line that la.elled structured finance roducts in the modern industry of financial alchemy" They were the ones who ultimately transformed toxic financial waste into tri le(% rated roducts as secure as U"/" Treasury .onds" Indeed the rating agencies were the ones la.elling .ottles filled with utrefying sludge and roduced en masse .y 8all /treet as ure drin!a.le s ring water, ma!ing everything loo! co acetic" The effect of credit rating agencies on ca ital mar!ets and wider finance cannot .e over estimated" Indeed what the rating agencies said was seen as gos el, a .ig fat stam of actuarial a roval that ensured that investors and regulators sim ly loo!ed at the fancy la.el, choosing not to investigate the rotten roduct hidden underneath" Thus ensuring that ension funds and other large scale institutional investors ( who .y rule are .arred from urchasing low grade securities H .ought fancy la.elled .ut worthless roducts .y the shed load" By giving their seal of a roval they ensured that investment .an!s could sell their toxic roduce all around the world" Barry 0itholtC et al" 5)++;, " )GA6 citing ,o.el Laureate 2ose h /tiglitC stated that =the rating agencies 5are6 one of the !ey cul rits" They were the arty that erformed that alchemy that converted the securities from 1(rated to %(rated" Indeed it is a.undantly clear that the =.an!s could not have done what they did without the com licity of the rating agencies 5i.id"6" They hel ed .an!s create E<") trillion of su. rime mortgage securities and generally the agencies awarded tri le(% ratings to B: ercent of those de.t ac!ages 5&vans and /alas, )++;6"

58

It was then re orted in the Co.urn and Levin 0e ort 5)+996 that over ;+D of the %%% ratings given to su. rime retail MB/s originated in )++A and )++B were later downgraded .y the rating agencies to @un! status" Most shoc!ingly the rating agencies had awarded su. rime filled MB/ and C#?s securities with investment grade status well into )++A even though the su. rime mortgage mar!et was listing heavily to one side and on the oint of ca siCing" Indeed the agencies only .egan to downgrade the status of MB/ and C#?s .y 2uly of )++B, a full year after warnings first sounded from the su. rime mortgage mar!et" %s a result ension funds and all sorts of entities had their .oo!s littered with @un! status .onds, unsella.le contagious roducts that colla sed the su. rime securities and C#? mar!et and cri led the wider economy" %s a result the 2uly )++B downgrade of su. rime securities and C#?s, which manifested itself in &uro e with the B,$ $ari.as funding crisis, was erha s more than any other, thee event that =triggered the .eginning of the financial crisis 5i.id"6 %s such, since they were the ultimate @udges of good and .ad, it was their inaction, inaccuracy, indifference, deceit and naivety that was a central and monumental failure that went towards firstly, sustaining the .u..le and secondly, reci itating the 7reat Crash" 3ad these agencies .een a.le to give an im artial and o.@ective rating on the merit of the underlying de.t then irrefuta.ly they could have =sto ed the arty 51ons, )+9+6 and thus .urst the housing .u..le long .efore it got out of hand"

59

$ource: &loo/+urg article +y ichard 8o/linson and .avid Evans, %!''9).

But why did the rating agencies fail so monumentally> %.ove all the reason lies with the massive conflict of interest that existed .etween the =.ig three and their friends and loyal customers on 8all /treet" Indeed the =issuer ays model had ensured that the .an!s 5issuers6 aid the agencies to rate their roducts and as can .e seen from the a.ove model the agencies received a huge ercentage of their income from the very .an!s whose roducts they rated" %s a result of this the rating agencies had .ecome de endent u on the investment and shadow .an!s for income which led them to fear that their revenue stream could Fuic!ly dry u if they did not rovide the investment .an!s with the ratings they so sought" Therefore the rating agencies all too often hy ed u the true worth of the structured de.t roducts" Indeed the =.ig three sacrificed accurate ratings in efforts to increase their .usiness and mar!et share which ensured the de letion of credit rating standards and a =race to the .ottom 5Co.urn, )+996" Moreover the criminality that was seen on 8all /treet .efore the crash extended into the world of the credit rating agencies" Indeed it was re orted at the hearing .efore the 3ouses Committee on ?versight and 7overnment 0eform 5)++*, and we would rate it" "<6 that a /tandard P $oors em loyee in the structured finance division had stated that =it could .e constructed .y cows,

60

%nother em loyee stated that =rating agencies continue to create an even .igger monster, the C#? mar!et" Lets ho e we are all wealthy and retired .y the time this house of cards falters 5i.id"6" Thus the ur ose of this section was to illustrate the starring role layed .y credit rating agencies in the run u to the 7reat Crash of )++*" The rating agencies occu y a s ecial lace in financial mar!etsJ however their ina.ility to give accurate credit analysis unleashed re ercussions that have extended far .eyond the world of finance" They .ro!e a .ond of trust and ultimately the story of the credit rating agencies was a story of =colossal failure 58axman, )++*6"

61

62

C/APTE, B5 A &'))AT!.+ .F T/E F!2E *EA*-3 &/.T& Concluding Thoughts on the Causes of the Financial Crisis

&ach of the : reci itating factors that caused the 7reat Credit Crash of )++* as outlined a.ove could not have created the housing .u..le inde endently of one another" 0ather the .u..le was the coming together of five deadly shots which unleashed a self(fulfilling and deadly reaction as each ingredient fed on the other, s urring each other on in a dangerous vertical vortex of fictitious housing wealth"

63

In summation this a er outlines the rise and fall of the )+++s housing .u..le as follows" 8ith hindsight we !now that following the colla se of the )+++ dot(com .u..le investors moved from stoc!s and towards real estate as a safe investment and concomitantly fear of a recession rom ted the U"/" central .an! to transition to low interest rates, assuring a .ountiful source of liFuidity to finance housing starts" Moreover the U"/" governments afforda.le housing olicy ensured .oth the continuation of a lax monetary olicy as well as romoting the relaxation of traditionally rigid mortgage lending standards" Thus the !een sense for real estate cou led with low interest rates and easy credit ensured that countless individuals across %merica and around the world .ought houses" %dded to the first two shots was then the third and most critical shot, that .eing the irrational e*u+erance of consumers" Indeed as the u trend in housing .egan the third shot was added, stirring consumers u in a wide s read mood of irrational exu.erance that crossed oceans and as a result households felt infinitely wealthier and too! on ever increasing levels of de.t" %s consumer and commercial de.t lia.ilities s!y roc!eted the fourth and fifth shots were added to the deadly mix" Certainly the reaction created from the coming together of the first three shots with modern alchemy and the trou.lesome credit rating agencies was deadly since the first three shots rovided 8all /treet and the rating agencies with the fodder and mar!et am.iance needed in order to ex and the housing .u..le ex onentially" Indeed the irrational e*u+erance =created an environment that was ri e for the cow.oy financing 5Ba!er, )++*6 and in that sense =8all /treets financial excesses were as much a sym tom of the .u..le as its cause 5/tutch.ury, )+9+6" Thats indeed why 0aghuram 0a@an 5)+9+, "9+;6 stated that the 1eds monetary olicy was

having such an effect on 8all /treet activity that it =was turning the United /tates into a gigantic hedge fund, investing in ris!y assets around the world and financed .y de.t issue to the world 50a@an, )+9+, "9+;6"

1or that reason it stands that 8all /treet financiers werent so much the trigger of the .u..le .ut rather the exaggerators of a .u..le and the ones who turned a .ig .u..le into a colossal .u..le" Indeed the early housing .u..le triggered .y low interest rates, a government
64

housing olicy and s urred on .y irrational e*u+erance layed into the hands of 8all /treet, roviding it with a wide range of de.t lia.ilities and in articular a hugely increased selection of home loans ( the feedstuff reFuired in order to forge the most com lex financial instruments"

Thus it is rather easy to conclude that the rocess of modern financial alchemy was not the rimary cause of the financial crisis" 3owever added to the first three shots it remains that modern alchemy and credit default swa s in articular were an =accelerant 5&conomist, )++*6 and tools that =transformed a financial .rush fire into a conflagration 5Morgenson, )++*6" In the end, once the : shots were mixed the world found out that they would come together in a mutually reinforcing reaction, each sustaining and ushing the other on in a self( er etuating u ward s iral" Indeed as the .u..le grew it s urred on the very factors that caused its genesis in a systemic liFuidity s iral that fed on itself, as a =housing .u..le s urs the economy directly .y increasing home construction, renovation, and sales and indirectly .y su consum tion 5Ba!er, )++A6" %nd as the a.ove s urred on ever more housing sales 8all /treet was inundated with mortgage de.t of all !inds which further fed the circular feed.ac! effect as the securitisation of mortgages unleashed further waves of credit .ac! onto the mar!et" Indeed =the rate of glo.al housing a reciation was accelerated .eginning in late )++< .y the heavy securitisation of %merican su. rime and %lt(% mortgages 57reens an, )+9+6" Thus the mutually reinforcing coc!tail created a ositive feed.ac! loo of investor enthusiasm that am lified the reci itating factors of a s eculative .u..le evermore" 3owever it was all fictitious housing wealth created .y the smo!e screen effect of the : shot deadly coc!tail" In the end it was a house of cards and the highly leveraged household and .an! .alance sheets im loded as housing rices reverted to fundamentals" Indeed as house rices and investor enthusiasm hit a crescendo, real estate soon ad@usted to core economic indicators, the edifice colla sed reverting the rocess into a negative feed.ac! loo that ensured that the am lification mechanisms wor!ed in a downward direction" %nd
65

orting

@ust as the rice increases .egot further rices increases, the .ursting of the asset .u..le ensured that rice decreases .egot further rice decreases" This a er has not sought to a.solve 8all /treet of its wrongs and ingrained culture of excessJ rather it has wor!ed to aint a larger icture" Indeed the 8all activities were art of a wider culture of excess that could .e seen amongst central .an!s, the U"/" Congress, consumers and rating agencies"

66

PA,T 2

67

!*E.-.G3 C.+&!*E,E*

C/APTE, 85 P.-!T!CA- !*EA-.G'E&

The ideas of 1riedrich 3aye! and 2ohn Maynard 4eynes 52M46 have rofoundly sha ed the social and economic olicies of governments across the world for nearly a century" Indeed the weighty influence that these olitical economists wield over the governance of society and of the economy cannot .e underestimated" Certainly that is why it is right to say that = ractical men, who .elieve themselves to .e Fuite exem t from any intellectual influences, are usually the slaves of some defunct economist 54eynes, 9;<A6" 3owever the a.ove citation would need to .e redacted in order to reflect

68

historical develo ments since for much of the last *+ years the ordinary man has .een enslaved to the ideas of at one time or another .oth 1riedrich 3aye! and 2M4 %nd yes it would a ro riate to state that 2M4 and his ideas reigned as !ing of the mar!ets from the mid(9;<+s until the late 9;B+s, in a eriod !nown as the age of em.edded li.eralism" Thereafter, the neoclassical or neoli.eral ideas as cham ioned .y 1riedrich 3aye! and others reigned su reme" Indeed that is why neoli.eralism has .een la.elled countless times as the ideology of our time"

8ell that is until the 7reat Crash of )++*, whereu on the faith in neoli.eral free mar!ets was shattered"

Thus it is necessary to consider the hiloso hies of these two cham ion ideologues whose conce ts ervade and run a rich vein through the economic olicies of governments and of modern finance" Thereafter it will .e a ro riate to consider how economic olicies should .e sha ed in the ost(crisis world"

i" Cohn )aynard 4eynes

British economist 2ohn Maynard 4eynes 59**<(9;GA6 and his cele.rated manuscri t 8he -eneral 8heory of E/ploy/ent, ,nterest and 0oney 59;<A6 was for much of the )+th Century the revailing economic orthodoxy .oth in the years throughout the 7reat #e ression and the four decades of em.edded li.eralism that followed 88II"

3aving la.elled the free and com etitive mar!et system a failed rationality, 4eynes dismissed the merits of the classical economics rofession, of li.erated mar!ets as well as monetary olicy, and rather advocated that governments im lement rescri tions of aggregate demand management as well as rice and wage controls, strong social welfare rotection and stiff economic regulation"
69

Through the aggregate demand management model 2M4 laid out that de ressed and .earish mar!et conditions, triggered .y a heavy dro in demand, could .e countered .y increased government s ending" Indeed he held that increased s ending could change the mood of the economy .oth .y raising the levels cash flow and levels of unem loyment"

Certainly 2M4 held that running a .udget deficit was something that was entirely rational in recessionary eriods" %nd li!ewise he maintained that a .oom eriod and .ullish mar!et am.iance could .e counteracted .y a reduction in the levels of government s ending, where.y 2M4 held that the de.t accumulated in the downturn could .e aid off"

Thus 2M4 held that governments should dictate the level of demand .y ta!ing an active role in the management of the economy" Indeed through aggregate demand lanning 2M4 maintained that as government s ending stimulates levels of demand and thus .rightens the mood of the economy, full em loyment could .e attained"

2M4 also sought to use aggregate demand management to increase welfare s ending through higher taxation in order to ensure the well.eing of the oor, elderly and @o.less" Indeed 2ohn Maynard 4eynes who advocated heavy government incursion into the social domain was one of the !ey architects .ehind Britains cradle to the grave social welfare system"

2M4 further har.oured a strong sus icion towards classical economists who ushed for limited government and of a self(regulating mar!et, and thus 2M4 advocated strong economic regulation"

Certainly many of the ideas ex ressed within 8he -eneral 8heory had .een generated from 4eynes inter retation of the causes of the 7reat #e ression" Indeed the social democrat held

70

that o en trade and international financial transactions had created real and tangi.le economic im.alances as well as ma@or disru tions to em loyment and u.lic de.t"

ro riately it is true to say that 4eynes was rather free trade(averse, and fearing what he

saw as the desta.ilising effects of large scale trade and financial flows, 4eynes ideas advocated trade restrictions, government intervention and ultimately largely closed economies"

In any case 4eynes was figuratively s ea!ing the chief economist for much of the world in the years that succeeded the war" Indeed =the huge ex enditures for wea onry clinched the 4eynesian doctrine that government s ending could underwrite ros erity 54ennedy, 9;;;, "*:B6"

3owever .y the late 9;B+s 4eynesian economic thin!ing had .een dealt a heavy .low as economies .oth in the U"/" and U"4 stagnated" Indeed the effect was such on the %nglo( %merican economies that neoclassical economists, led .y 3aye!, were a.le to ta!e centre stage and ut forward their case for the rivatisation, deregulation and li.eralisation of mar!ets and in doing so they .reathed life .ac! into the credi.ility of the classical economics rofession as e itomised .y %dam /mith and his idea of the invisi+le hand of the mar!et"

ii" Friedrich /aye7

The life and wor! of %ustrian .orn 1riedrich 3aye! 59*;;(9;;)6 was the direct continuation of a rich lineage of economic thin!ing that stretched .ac! to the father of modern economics, %dam /mith 59B)<(9B;+6, infamous for his wor! 8he 1ealth of 4ations as well as his notion of the invisi+le hand of the mar!et"

71

Indeed 1riedrich 3aye! who continued in the ways of %dam /mith gave classical economics a contem orary twist and as a result 3aye! and his contem oraries .ecame !nown as neoclassical or neoli.eral economists"

%nd .y ta!ing advantage of the demise of the 4eynesian economic thin!ing of government lanning and of demand management in the late 9;B+s, 1riedrich 3aye! ensured that neoli.eralism .ecame em.edded as the dominant economic aradigm from the late 9;B+s" %s a result it has .een said many times that neoli.eralism has .een the ideology of our time" In order to .est understand 3aye!ian ideas of free mar!ets it is necessary to consider .riefly those of %dam /mith" Certainly the long road of classical and neoclassical economic thin!ing that has weaved across nearly three centuries finds its source with the wor! and ideas of %dam /mith" In any case /mith was unremitting in advocating the case for limited government, laisseC( faire and the a.ility of the self(interested homo economicus to ros er in an environment of unfettered mar!ets and unrestrained com etition" 3is steadfast view of the mar!et largely stemmed from his erce tion of the natural world and his reference for an environment in which individuals could act freely as o osed to .eing su.@ected to over.earing governmental coercion" 3e stated that the self(interest of the individual to romote his own well(.eing as well as ca ital accumulation would indirectly romote the interests of wider society" =By ursuing his own interest, he freFuently romotes that of the society more effectually than when he really intends to romote it" I have never !nown much good done .y those who affected to trade for the u.lic good 5/mith, 9BBA, ":B)6"

Indeed he .elieved that limited government intervention was the !ey to mar!et efficiency, social efficiency, strong develo ment, affluence and growth" /tate interventionism for %dam /mith was to curtail the a.ility of the individual" Thus on so many levels the classical li.eralism of %dam /mith diverges heavily from the 4eynesian economic doctrine of governmental aggregate demand lanning and social li.eralism"

72

3aye! .uilt on the wor! of /mith in cham ioning the retreat of the state and the a.ility of the self(interested individual" 3e was dee ly anti(.ig government and central lanning and .elieved the modern economy to .e a form of =s ontaneous order which was vastly su erior to that of any lanned economies" Certainly 3aye! held that unfettered forces of the mar!et were the most efficient medium for the allocation of scarce resources" 3e further em.raced rivate ro erty rights, freedom of contract, sta.le monetary olicy, fiscal conservatism and a.ove all the mar!et economy as o guarantor of a ros erous, free and eFuita.le society" 3is .elief was that !nowledge in the mar!et is a local henomenon thus rendering any efforts of central lanners defunct" Indeed =the .rilliance of a mar!et economy was that it allocated resources through the decentraliCed decisions of a myriad of .uyers and sellers who interacted on the .asis of their own articular !nowledge 51u!uyama, )+996" 1or 3aye! the remit of government was sim ly to create and u hold the law of the land that is eFually a lied" osed to government as the

iii" A &u

ation

3aving reviewed in $art 9 the causes of the financial crisis and then in $art ) the ideology that under inned financial mar!ets re()++* this a er concludes that 4eynes was indeed the correct immediate res onse in the wa!e of the colla se of the glo.al finances" 3owever whilst aggregate demand lanning with increased government s ending can fill a demand hole, .ring a.out immediate and tangi.le results and hel avert a de ression, it is nevertheless clear that 4eynesianism is not a long term solution" 0ather a sustained economic recovery needs the restoration of normal credit flows, not the artificial ways of 4eynes centraliCed governmental demand lanning" Certainly it would .e right to say that long term government s ending in times of recession is what the hair of the dog is to a hangover, it merely delays the ain" Thus this a er holds that 3aye!ian and neoli.eral rescri tions of free and li.erated mar!ets should .e the future of %merican and 8estern social and economic olicyma!ing" 3owever at the same time this a er recogniCes the ma@or failings of excessively li.eral financial
73

mar!ets re()++* as was ex erienced through the wild exor.itance of modern financial alchemy" Certainly as a result of the financial crisis 2oanna Ben@amin 5)+9+6 was right to state that =freedom and res onsi.ility are the woof and the weft of genuine li.eralism" 53owever6 In the years leading u to the summer of )++B, certain financial mar!et artici ants too! u the former, .ut discarded the latter" Many areas of the economy and financial mar!ets were su.@ected to heavy regulation and oversight .efore the crisis, yet other areas, such as the over(the(counter mar!et for C#?s and C#/s, remained hideously under regulated" %s a result of the lac! of oversight, the su the interests of shareholders and of wider society, .ut rather devastated them" Thus the Fuestion now stands as to how far to the Left of the ideological s ectrum the endulum of financial regulation should swing or in other words to what extent rivate financiers should .e left to roam the astures of the glo.al economy> There is a delicate and su.tle .alance to reach" Undou.tedly we need the free circulation of ca ital, free mar!ets and economic li.erty that is needed to ensure that the individual ingenuity, entre reneurialism and creative forces of man can hel create growth and wor! towards exiting the crisis" 3owever this must .e .alanced against sensi.le economic regulation in order to rotect the wider interests of society and of glo.al economic sta.ility" The crisis has shown that one cannot rely on the self(interest of mar!et artici ants in unregulated mar!ets to romote the interests of themselves and wider society" Indeed their deceit and ram ant dishonesty has destroyed any arguments that ush for unregulated financial mar!ets" -et the endulum cannot swing so far as to smother the free flow of ca ital and the ingenuity of man" There must .e a sensi.le and harmonious .alance" Indeed it was /enator Tom Co.urn 5)+996 who co( roduced the A<: age Levin(Co.urn 0e ort following a two year investigation into the causes of the crisis stated that =the free mar!et has hel ed ma!e %merica great, .ut it only functions when eo le deal with each other honestly and trans arently"
74

osed

self(regulation of mar!et artici ants and of lending institutions did not in the end romote

Thus it is unFuestiona.le that there is a role to .e layed .y the government in order to revent the evils of high finance yet .alanced so as to allow man to ex ress himself free of an excessively over .earing state" Thus government intervention should reach into the economy to the extent that 2ohn Maynard 4eynes so rescri.es" 1or in many ways communism and 4eynesian social democracy are =merely different versions of a single malaise they called collectivism 5Manne, )+9+6" Thus this a er holds that economic li.eralism will revail, the excesses of which must .e .alanced .y sensi.le economic regulation" Indeed in the words of #ieter $esendorfer 5)+9+6 we should ex ect a =moderate reformulation of neoli.eralism in terms of its ordoli.eral conce tualisation" Certainly the ordotheorist 3ans(8erner /inn 5)++;6 stated that =%merica needs 8alter &uc!en, the father of ordoli.eralism" ?rdoli.eralism, a distinctive strand of li.eral economic thin!ing, is not entirely dissimilar from neoli.eralism in that it cherishes the efficiency of the free mar!et" 3owever ordotheorists differ from neoli.erals in that they do not see the mar!et as a natural economic rationality, rather they see it as inherently unsta.le" %s a result they es ouse a mar!et economy that is constituted .y norms, thus they have long since cham ioned the need for an wirtschaftverfassung 5economic constitution6" Thus this a er concludes that an economic constitution which sets out the rules of the game or the road mar!ings could well hel framewor!" %fter all the 1inancial Crisis &nFuiry 0e ort 5)+99, neither s eed limits nor neatly ainted lines> Thus ordoli.eralism with its constitutional a roach could well correct the failings of neoli.eral economics and hel romote the institutional ers ective which has for so long .een a.sent in neoli.eral writings" "9B6 stated in regard to the causes of olicyma!ers in the creation of a ost(crisis regulatory

the 7reat Crash of )++* that =what else could one ex ect on a highway where there were

75

76

77

PA,T >

0/3 EC.+.)!C -!(E,A-!&) 0!-- P,E2A!-

78

C/APTE, D5 -E&&.+& F,.) ,..&E2E-T& +E0 *EAThe saying goes that a lesson lived is a lesson learnt and if a lesson is to .e learnt from having lived through the 7reat #e ression it is that the reactionary and authoritarian olicies of $resident 1ran!lin #elano 0oosevelt were dee ly damaging" They were social and economic olicies that in fact rolonged an economic contraction" Indeed the ,ew #eal did not end the 7reat #e ression or restore ros erity, rather that was the doing of the =incidental and ironic wor! of a terri.le war 54ennedy, 9;;;, "xiv6"

i" The ,ed *ecade

8ith a near three decade long trail of economic growth and a B year .oom, ca italism had long .een in the ascent in the United /tates" 3owever the 9;); stoc! mar!et crash on 8all /treet shattered the halcyon state of the economy, turning the fortunes of all of %merica
79

u side down" Indeed .y 9;<) unem loyment had a roached the thirteen million mar! 51retC, 9;B<, "9<96 and with a revailing Left and o ulous climate and the #emocrats in ascendance, $resident 0oosevelts ,ew #eal .rought a.out ma@or changes to %mericas economic com ass"

Indeed 0oosevelts inauguration in March 9;<< was the start of session for a federal government that would increasingly involve itself in matters that were hitherto the .usiness of the individual and the worry of .usiness"

Indeed the ,ew #eal, welcomed .y trade unions and socialists, ordained government with a tas! to radically increase s ending, to raise taxation and redistri.ution, to install heavy economic regulation and to esta.lish autocratic rice and wage controls"

Thus whilst the %merica of the 9;<+s was one that was suffering dee ly, it was also an %merica that was .uying into the olicies of collectivism and central lanning" It was a time of =ex anding aternalism, an era of = roliferating .ureaucracy and in many ways the ,ew #eal started a decade that was to .e =dee ly olluted .y /talinist infiltration 5Lyons, 9;G9, "9BG6"

Indeed the endemic social and economic ain =gave the /oviet news a ers am le material to rove that the ca italist world was in violent dissolution 5Lyons, 9;G9, "B)6 and as a result the government and eo les turned away from the ideological orthodoxy that had sha ed earlier decades of economic olicy(ma!ingJ rescri tions of free mar!ets, li.eralisation and deregulation"

0o.ert /hiller 5)++*,

";B6 was right to o.serve that the 9;); stoc! mar!et crash stirred u a

o ulist .ac!lash which hit .an!ing, finance, free mar!ets, ca italism and the %merican way of life very hard" Indeed %mericans increasingly .egan to .e won over to communist theories

80

and as a result the 9;<+s and the era of the ,ew #eal are rather a ro riately referred to as the =0ed #ecade 5i.id"6"

It is thus of utmost im ortance to consider the ,ew #eal in more de th, to draw out the mista!es of 0oosevelts calamitous olicies of collectivism and wholesale government intervention and to a ly them to our learning in order to right todays u turned world"

ii" ,oose6elt and his *epressionEProlonging Policies

It is well esta.lished that = olicy .lunders .y the 1ederal 0eserve, Congress, and $residents 3er.ert 3oover and 0oosevelt .attered the economy on many fronts 5&dwards, )++:6" Indeed the age of the 7reat #e ression that lasted for over a decade des ite the .est efforts of the federal government was a la.oratory of interventionary economic olicies and thus a la.oratory of interventionary olicies that we can learn a lot from"

Indeed the lessons of the 7reat #e ression are the !ey to understanding the current crisis and an instrumental iece in the @igsaw that will hel us to sha e a recovery" % microcosm of economic contraction( rolonging olicies, the ,ew #eal taught a harsh lesson that tells us that an active government and wholesale intervention sim ly rolongs an economic downturn"

The first #e ression( rolonging olicy was the im lementation of the 7lass(/teagall %ct which su.@ected the .an!ing industry to more extensive oversight and in articular ensured that retail and commercial .an!ing ractices would remain se arate from investment .an!ing o erations"

81

Indeed the .an!ing rofession was seen almost in totality as the cause of the 7reat #e ression and $resident 0oosevelt 59;<<6 was articularly vociferous in his critiFue of the =economic royalists" The radical sentiment, anger and distrust har.oured .y the o ulous and the federal government towards the .an!ing rofession was such that Congress enacted a rocession of restrictive legislation"

3owever the economic olicies of 0oosevelt ut the world of .an!ing in a straight@ac!et of regulation, cho!ing off lending and any real chances of allowing .usiness and individuals to forge a recovery" Indeed the .urdensome restrictions that were laced over .an!ing, trade and investment cri led the very mechanisms that were needed in order to engender a recovery"

% second #e ression( rolonging olicy of $resident 0oosevelt was the enactments of laws that welcomed the cartelisation of industry and the extermination of com etition" Indeed $resident 0oosevelt had .elieved =that the severity of the #e ression was due to excessive .usiness com etition that reduced rices and wages, which in turn lowered demand and em loyment 5Cole, )++<6"

These ideas stemmed from a num.er of 0oosevelts economic advisors who were artefacts of an earlier generation, economists from the 8orld 8ar I era who .elieved that =wartime economic lanning would .ring recovery 5i.id"6"

In the end however it was in large art the cartelisation of industry and the extermination of com etition that was a ma@or factor that rolonged the #e ression"

3owever these days we must live .y a different mantra, one that maintains that com etition is everything" %fter all com etition it is the steady hand at our .ac!, ushing us to .e faster, .etter, smarter, 58all /treet 2ournal, )+99, "%9G6 and luc!ily this time round governments have stood .y the idea that com etition is the route towards recovery"

82

Indeed the reaction to the 7reat 0ecession thus far has not .een to mirror 0oosevelts anti( trust olicyJ on the contrary ,eelie 4roes 5)++;6 the former &uro ean Com etition Commissioner, stated that =com etition is art of the solution to our economic ro.lems"

% third #e ression( rolonging olicy that 0oosevelt enacted was also the /moot(3awley Trade %ct which raised tariffs and thus affected heavily the free flow of trade, ca ital and international commerce ( the very things that were needed in order to !ee credit flowing, to !ee the economy tic!ing over and to engender a recovery" % fourth #e ression( rolonging olicy was that of the 1ederal 0eserves tightfisted caution, unyielding inactivity and shortsightedness in refusing to ex and the money su ly"

1ortunately the 1eds lac! of flexi.ility and ada ta.ility during the 9;<+s was not mirrored come )++* when the U"/" central .an! ensured wides read liFuidity su the worst of the downturn .y lowering interest rates near to Cero" Indeed money su ly is the life.lood of the modern economy, .an!s need to .e a.le to lend ort to ailing .an!s, hedge funds, mutual funds, rivate com anies, com anies, and insurers as well as lacating

and .orrow to sustain daily activities and to .uild a healthy recovery and the worst of the 7reat #e ression could have .een averted had the 1ederal 0eserve .een more roactive .y ex anding the monetary .ase" %nother ma@or trauma .low that rolonged the 7reat #e ression was the huge tax increases im lemented .y $resident 0oosevelt who levied :+D tax on a huge ro ortion of the country and the to rate marginal tax rate landed at B;D" Thus stifling innovation, entre reneurialism and sending out a message that the country was not o en for .usiness

iii" -esson -earntF

The story of the 7reat #e ression shares a similar narrative with todays 7reat 0ecession" Indeed .oth stories tell a classic tale of .oom which shattered a longstanding faith in free mar!ets"
83

Certainly .oth economic colla ses rovided the ground for an ideological .attlefield and gave centre stage to the voice on the Left" 3owever in the wa!e of the 9;); crash the Left won the ideological .attle" -et this wild and rec!less @olt to the left which as this a er has illustrated, rolonged the 7reat #e ression" 8hilst it is unFuestiona.le that the 7reat Credit Crash illustrated the raw excesses of free mar!ets, it is well documented that = lanned mar!ets are flawed, unsta.le and excessive too 5Carr, )++;6" The 7reat #e ression and its flawed methods of economic lanification is @ust such an exam le" Indeed =the main lesson we have learned from the ,ew #eal is that wholesale government intervention can ( and does ( deliver the most unintended of conseFuences 5Cole and ?hanian, )++*6" Thus governments and olicyma!ers must learn from these mista!es and avoid tem tations to raise the rofile of government" 0ather the ro er role of government is to ste in during times of crisis, .ut ultimately it is industry and ingenuity of the individual, guaranteed through individual li.erty, that will lead to recovery" Indeed Chris &dwards stated that the secret to the recovery from economic contractions is to ensure that =the government generally 5stands6 aside and let5s6 the mar!et recover itself 5&dwards, )++:6" Indu.ita.ly a recovery cannot .e manufactured out of government good will and s ending" Thus it is in no.odys interest to ursue a lanned or collectivist future as we are all to aware now that =collectivism, whether it is in 7ermany, the former /oviet Union, Britain or the U/%, ma!es ersonal li.erty its victim 58illiams, )+9+, "9A6"

Moreover we need to learn hard lessons from the federal housing rogram of Clinton and Bush which was in essence a continuation of 0oosevelts ,ew #eal and of Lyndon 2ohnsons 7reat /ociety rogram" %nd li!e the ,ew #eal the federal housing initiative offers =im ortant lessons a.out the dangers of government efforts to mani ulate or con@ure outcomes in the mar!et 5/taff 0e ort, )++;6"

84

In concluding it must .e reiterated that it is of utmost im ortance that we learn from the errors of 1ran!lin #elano 0oosevelt as it was his mista!es that ultimately =transformed the 3oover recession into the 7reat #e ression 5,is!anen, )++;6"

85

C/APTE, #05 -A+* .F T/E F,EE

3ere we will consider %merica and the creative forces of individualism"

i" Arnold &ch9arGenegger: !ndi6idualis

and &ocialis

In the o ening to the 9;;+ relaunch of Milton and 0ose 1riedmans famous television series =1ree to Choose %rnold /chwarCenegger gave an introduction extolling the unrivalled
86

excellency of individual li.erty" /haring with viewers his travails of coming to the United /tates from a state centred %ustria /chwarCenegger stated that he !new from a young age that he =wanted to .e the .est" -et he !new that the country of his .irth could not rovide him with the eo le, networ!s and inventiveness that would .e needed in order to turns his muscles into money, to allow him to .ecome a B times Mr" Universe, a 3ollywood .loc!.uster and olitical heavyweight" /chwarCenegger instinctively !new that =individualism li!e that 5was6 incom ati.le with socialism, so 5he6 felt 5he6 had to come to %merica" The story of %rnold /chwarCenegger is one that em.odies the innacle of human achievement .ut it is also one that chimes mightily with the tale of %merica as the land of the free and %merica as the land of o ortunity" % tale that has rever.erated and .een recounted around the world many times, ins iring countless to come forth" 3owever the tale of %merica as the land of freedom and o finance" Indeed as outlined in the earlier cha ters, the effect that %merica has on other countries around the world is instrumental, as when %merica sings, the world dancesJ however with the su. rime crisis we saw that when %merica sneeCes the rest of the world catches the cold" Thus the olicy, regulatory and legislative future of %merica is not only its future .ut that of the whole world" Thus as %merica exits the crisis and erects a ost(crisis infrastructure olicy ma!ers must remem.er that the story of %merican freedom is a very real one" It is a story that is inextrica.ly lin!ed to the historical foundations of the United /tates and the context in which early settlers left the ?ld 8orld destined for a new life" Indeed early %mericans fled &uro e in order to esca e religious ersecution, intolerance and an over.earing state" %.ove all they wanted a new life and ersonal freedom" /omething that %merica could guarantee" -ears later stories would oscillate .ac! across the %tlantic that told the story of un.ounded o ortunity, land and freedom" Indeed many more made the assage across the %tlantic with an eye to conFuer the 7reat $lains and to ex loit the unham ered freedom and ma!e their ortunity has im ortant

re ercussions for the world today, the future of %merica, of other nations and of international

87

fortune" It was the voluntary movement of waves of industrious and inventive men and women, ris!(ta!ers drawn to a free and .ountiful land" This was the %merican #ream" The dream of un.ounded li.erty and riches that awaited those who sought to rove their worthJ =the dream of a land in which life should .e .etter and richer and fuller for everyone, with o 5%dams, 9;<96" The constant Fuest for individual li.erty and the instinctive sense of state(aversion is thus something that is derived directly from %mericas ancestral forefathersJ it is rooted dee in the cultural #,% and social fa.ric of %merica" Indeed that is why Thomas I" $alley 5)++G6 was right to o.serve that =at the cultural level, %merica has always cele.rated radical individualism, as e itomiCed in the frontiersman image" Individual li.erty is thus the golden thread that weaves throughout the fa.ric of %mericas social, olitical and economic cor us" It is something that %mericas ancestors fought for and crossed the high seas for" Indeed individual li.erty has sha ed a nation and defined generations of %mericans" %merica is still that today" It is still the freest country in the world and one that offers un.ounded o ortunity to those of a.ility and erseverance" 1reedom is what has made %merica great and unFuestiona.ly the cele.ration of the individual continues to allow %merica to create an unrivalled infrastructure of !nowledge, olitical and economic rowess, technological advances and a nation and citiCenshi of unrivalled a.ility" Indeed it remains in the )9st Century that =the real ath to ros erity, olitical unity, and the %merican mainstream is self(reliance not de endence on government 5Badillo, )++A6" It is a hiloso hy that maintains that the smaller the government is, the .igger the citiCen will .e" Indeed this is the formula that has long .een =the secret to %mericas great success 5$rager, undated6" The eo les of %merica @ust li!e their fore.ears continue to cherish self( sufficiency, self(governance, social and ersonal res onsi.ility and economic freedom" 'alues which have sha ed a citiCenry, culture, olitics and which have made a nation great" That is why %merica cannot allow government to .ecome .ig in the ost(crisis world, for remem.er, the smaller the government, the .igger, the freer and the more a.le the citiCen shall .e" The freer the individual will .e to innovate, create enter rise and to orchestrate a ortunity for each according to a.ility or achievement

88

recovery" Indeed Tony Blair 5)+9+6 remar!ed =that the recovery will .e led not .y governments .ut .y industry, .usiness and the creativity ingenuity and enter rise of eo le" The .ig state has layed its art, it su.sidised where it did not nationalise, and .y doing so it saved the glo.al economy from financial %rmageddon" But now its @o. is done" ,ow the role of the government is to move .ac! and allow the citiCen to .e .ig once again" % .ig state would ham er any chance of recovery" Moreover a .ig state would carve out the core, distort and alter indetermina.ly the very character of %merica and its eo leJ the very thing that ma!es %merica great"

ii" The +e9 0orld of Finance

Todays financiers are the Christo her Colum.us, the Thomas Coo!es, and the ,eil %rmstrongs of the )9st Century" There is something innate in man, the force in man that drives him to .e the greatestJ to ex lore and to ush the .oundaries of human endeavour" Indeed the in.orn trait that drove man to colonise countries around the world, to .e resourceful, to .e creative and to invent, is the same trait that drove man to engineer the most com lex financial instruments and transactions" The assion that sto!ed the fires in the .elly of Christo her Colum.us to find the ,ew 8orld is the same instinctive drive that ins ired the 2"$" Morgan team to synthesise the loftiest of financial creations" These were not ordinary .an!ersJ they were intellectual owerhouses, financial scientists, engineers and architects" $ushing the frontier and drawing new .oundaries in the new ,ew 8orld for the .etterment of man!ind" UnFuestiona.ly however these modern day ioneers went too far" The wheel came off the wagon and they made some colossal mista!es which was the ruin of many" 3owever finance can .ring a.out un.ounded cultural and economic riches when o erated sensi.ly" /o sensi.ly regulate the ioneers, give them the rules of the game and the road mar!ings .ut dont sFueeCe out the ingenuity and the drive of man" #ont de rive modern financiers of their freedom and revent them from doing what man has always sought to do, to ex lore, colonise, settle, invent, trade and advance" 1or these reasons ex lained a.ove %merica must not ma!e a ost(crisis !nee @er! move to the Left" %merica doesnt need any 0ooseveltian methodsJ rather %merica needs = lans .y the

89

many, not .y the few 51ight of the Century, 0ound )6" Thus %merica must consolidate its osition"

90

91

C/APTE, ##5 +AT',A- ,/3T/): T/E FA('-.'& F,'!T& A+* T/E F!CT!.+ .F +E.-!(E,A-!&)

The enultimate scene of this a er is to .e a short cha ter that adds to cha ters ; and 9+, consolidating the reasons why free mar!ets will revail"

i"

The +atural ,hyth

of (oo

and (ust

The rhythm of .oom and .ust has existed from time immemorial" Indeed =mar!et crashes are almost as old as the invention of money itself 5Tett, )++;, "xvii6 and ostensi.ly =credit "GB6" colla ses have .een glo.al since at least 9B)+ 5Bloom, )+9+,

In a similar fashion one can say that =the recent su. rime financial crisis is hardly uniFue as it was very much one that followed a =well(trodden ath laid down .y eight centuries of financial folly 50einhart and 0ogoff, )++*a6" Certainly as one loo!s .ac! over the millennia and a landsca e itted with the remnants from the dramatic rise and fall of the dinosaurs, the ascent and colla se of the 0oman &m ire as

92

well as that of the &gy tian and Mayan &m ire and numerous other so histicated forms of life, the rhythm of .oom at once a ears as an entirely routine as ect of life on earth" The same rule a lies to the world of finance and economics, after all the economy is organic" Indeed in recent centuries the world of finance has ex erienced .outs of irrational exu.erance which has fuelled financial tur.ulence over regular intervals" The oft(cited #utch tuli mania of 9AG+ is @ust one such exam le at hand and is somewhat ty ical of the three and a half centuries of financial tur.ulence that succeeded it" More recently as throughout the )+th Century there have .een regular ea!s and troughs of economic activity and mar!et confidence" 1rom the 8all /treet crisis of 9;+B, to the great stoc! mar!et colla se of 9;);, the stagflation of the 9;B+s and the economic tur.ulence related to the /avings and Loan crisis of the late 9;*+s and the Latin %merican .ond defaults of the 9;;+s" The 0ussian #e.t crisis of 9;;* triggered .y the %sian financial crisis of 9;;B which later s illed into the neigh.ouring Baltic countries and irrefuta.ly 2a ans =lost decade of the 9;;+s as well as the tech crash of )+++I)++9, more recently the 7reat Credit Crash of )++* and currently the sovereign de.t crisis in &uro e and %merica are all manifestations of the natural rhythm of .oom and .ust" Loo!ing through the lens of history it .ecomes increasingly a arent that = eriodic .ursts of chaos are normal 5Mc0ae, )++*6" Certainly 7illian Tett 5)++;, ")9)6 citing 2"$" Morgan to shot Bill 8inters stated that =every four to five years there is a new excess in .an!ing H you had the %sian crisis, then the internet .u..le" The ro.lem this time 5was6 the extraordinary excess in the housing mar!et" Thus the ur ose of this section was sim ly to highlight that there is something in man and all organic life on earth that .rings a.out a natural rhythm that .ears witness to eriods of highs and lows, eriods of creation and destruction and eriods of new and old" $erha s the .uilding u and .rea!ing a art of so histicated civilisations and com lex economies is as natural as the rocess of .irth and death" Indeed 3oward Bloom 5)+9+, "GA6 stated that =de ressions dont come from out technologies" They come from our .iology" Certainly this a er ro oses that nothing in life is constant, uniform or unchanging" Li!e the seasons, weather and the mood of man, all organic life is in a constant state of flux" Thus whilst man can strive to attain redicta.le and steady growth, the laws of nature will ensure eriods of .oom and e isodes of dramatic crashes will continue well into the future"

93

ii"

The Fa8ulous Fruits of Finance

The earlier cha ters .rought the reader on a tour down memory lane, a tour that has more than highlighted the deleterious failings of high finance and surre titious high financiers" 3owever there are fa.ulous fruits to .e .orne from finance when it is conducted ro erly" Indeed ever since neoli.eral free mar!ets .ecame the economic orthodoxy over <+ years ago the world has seen unrivalled technological, social, olitical and economic rogress" % eriod of time that has lifted man out of overty and into the twenty first century" 'ery few in the western world cannot say that they do not have a ersonal com uter, la to or T'" Indeed ca italism, the free mar!ets and the freedom and ingenuity of man created the i hone in your oc!et, your car ar!ed outside and countless other luxury items, and more im ortantly made them afforda.le and thus .rought them to the masses" The level of anger ex ressed towards financiers and the very existence of modern finance is rather understanda.le in many ways" 3owever finance is what ma!es the world go round, incentivises and su 5Tett, )++;, ")*6" orts the glo.al infrastructure and if exercised ro erly with restraint and integrity it is immeasura.ly good and rather im ortantly it =serves a u.lic utility function

Indeed the changes to finance and the financial landsca e that have ta!en lace over the last <+ years have =made the world much .etter off 50a@an, )++:6 and =im roved countless lives 5Carr, )++;6" /hiller 5)++*, "9BB6 rightly notes that financial technology that is ro erly used =can .e a owerful means for ma!ing everyone .etter off" 8e live in the )9st Century, an exciting age of 7oogle, i ads and i hones, 1ace.oo!, /!y e and an unlimited smorgas.ord of luxuries availa.le to one and one for all" Thus des ite the dire economic situation =we should not ta!e this eriod of great ros erity, one that has seen the largest im rovement in living standards of the greatest ro ortion of the worldQs o ulation ever !nown, for granted 5Mc0ae, )++*6" Certainly western li.eral economic olices have .een raising living standards for generations and to Fuestion free mar!ets and )9st Century finance is to eat the hand that feeds you" Individual li.erty, free mar!ets and the ca italist system gives o
94

ortunity and ho e to the

masses, whilst .ig government and lanification offers only one route, the diminishment of the individual and eFual ineFuality"

iii"

+eoli8eral Fiction

,eoli.eralism as a theory outlined in academic @ournals and text.oo!s is not a true olitical rationality" Indeed the ideas that are rescri.ed on a er .y %dam /mith and 1riedrich 3aye! come very far from living out in reality"

Indeed to say that we live in an age of neoli.eralism has .een challenged .y 2ohn Braithwaite 5)++:6 who has held that it is more a ro riate to suggest that we live in an age of =0egulatory Ca italism"

Certainly Braithwaite contends that the world in which we live is one in which there is ever more regulation at all levels of society" Thus he holds that neoli.eralism is a fiction in that the ratio of those who hold that neoli.eralism is an economic rationality is inherently flawed" Indeed Braithwaite stated that there is a reci rocal relationshi .etween cor oratisation and regulation in that it creates a situation in which there is more =governance of all !inds 5i.id"6"

Certainly the ideas of 3aye! and other neoli.erals have indeed sha ed olicies, .ut they have come far from creating a neoli.eral world" Indeed what is said on a er .y the li!es of 3aye! is very much different from the world in which finance and mar!ets live .y" The asymmetry .etween the scholarly wor! of 3aye! et al" versus reality has .ecome increasingly documented and Thomas I" $alley 5)++G, "G6 o.served that neoli.eralism =has de arted from its theoretical rhetoricO" 5and6 in ractice, olicy has not .een a lied as ure neoli.eral theory would suggest" Indeed #avid Levi(1aur 5)++*, ")+B6 added to the increasing commentary on the matter when he remar!ed =that there are wide ga s .etween the dominant narrative on neoli.eral deregulation and the emerging realities of a regulatory ex losion"

95

Thus this is a ma@or issue that must .e resented to all those who denigrate the failings of the free mar!ets and of neoli.eralism who fail to o.serve the large schism that exists .etween the theory and ractice of neoli.eralism" &ncouragingly $esendorfer 5)+9+6 ic!s u on the theory versus reality divergence and exalts that =it is exactly the contradictions .etween theory and ractice that might allow neoli.eralism to recover from the current situation"

96

C.+C-'&!.+

This discussion has in no way rofessed to have all the solutions to such a com lex to ic as the causes and the solutions of 7reat Credit Crash of )++*" It has however attem ted to outline some of the !ey causes, considered the ideology that has sha ed financial mar!ets and resented some general insights which may go some way to hel in the formulation of future economic olicies" Certainly with such a com lex and .orderless matter as the financial crisis some sort of lateral and forward thin!ing is reFuired in order a roach such an issue" There were a myriad of causes to the financial crisis .ut ultimately through a detailed analysis of some of the ma@or causes of the crisis as well as the ideology that under inned the mar!et structure ore( )++*, this a er has shown that free financial mar!ets and the freedom that it gives man to ex lore, trade and invent is something that will go on for many years to come" This a er has sought to show that neoli.eralism and individual li.erty fills eo le with ho e and as iration, it ma!es eo le want to .e inventors, entre reneurs, .usiness men and

97

women, oliticians and s orts stars" It allows eo le to do so de ending not on .irth .ut on a.ility and merit and thus with a sensi.le reformulation the ros erity of man can .e guaranteed so long as governments continue to em.race li.eral economic olicies" "

98

0eferences

%al.ers, Manuel B" 5)++*6 =The 1inancialisation of 3ome and the Mortgage Mar!et Crisis, Co/petition and Change, 9)5)6R "9G*(9AA"

%dams, 2ames Truslow" 59;<96 =The & ic of %merica" %ndrews, &dmund L", #e La Merced, Michael 2", 8alsh, Mary 8illiams" 5)++*6 =1eds E*: Billion Loan 0escues Insurer, 8he 4ew 5ork 8i/es, 9Ath /e tem.er )++*" %vaila.le online atR htt RIIwww"nytimes"comI)++*I+;I9BI.usinessI9Binsure"html, accessed 9<th 2uly )+99" Ba!er, #ean" 5)++A6 =The Menace of an Unchec!ed 3ousing Bu..le" &conomists 'oice" %vaila.le online atR htt RIIic"ucsc"eduISfravennaIecon9++nIch9:housing.oomBa!er" df, accessed )Ath May )+99" Ba!er, #ean" 5)++B6 =Midsummer MeltdownR $ros ects for the /toc! and 3ousing Mar!ets" Center for &conomic and $olicy 0esearch" %vaila.le online atR

99

htt RIIwww"ce r"netIdocumentsI u.licationsI#BTMidsummerD)+MeltdownD)+1inal" df, accessed );th 2uly )+99" Barrett, $aul M" 5)++;6 =0ewriting the 0ules, 8he 4ew 5ork 8i/es, 9)th 2une )++;" %vaila.le online atR htt RIIwww"nytimes"comI)++;I+AI9GI.oo!sIreviewIBarrett(t"html, accessed :th % ril )+99" Bec!er, 7ary" 5)+996 =The 7reat 0ecession and 7overnment 1ailure, 8he 1all $treet :ournal, )nd /e tem.er )+99" %vaila.le online atR htt RIIonline"ws@"comIarticleI/B9+++9G)G+:<999;+G9;;G+G:BA:<A;<+A+A;<<<<)"html> modUgooglenewsTws@, accessed )nd /e tem.er )+99" Bec!er, 2o", /tol.erg, /heryl 7ray", and La.aton, /te hen" 5)++*6 =8hite 3ouse hiloso hy sto!ed mortgage .onfire, 8he 4ew 5ork 8i/es, )9st ,ovem.er )++*" %vaila.le online atR htt RIIwww"nytimes"comI)++*I9)I)9I.usinessIworld.usinessI)9iht()9admin"9**G9:B)"html, accessed 9Bth %ugust )+99" Bernan!e, Ben" 5)++;6 =$erson of the -ear )++;, 8i/e 0aga;ine, interview with Ben Bernan!e" %vaila.le online atR htt RIIwww"time"comItimeIs ecialsI ac!agesIarticleI+,)**+G,9;GA<B:T9;GB):9T9;G*+G<,++" html, accessed 9Bth 2une )+99" Bernan!e, Ben" 5)+9+a6 =Monetary $olicy and the 3ousing Bu..le" %nnual Meeting of the %merican &conomic %ssociation, %tlanta, 7eorgia, <rd 2anuary )+9+" %vaila.le online atR htt RIIwww"federalreserve"govInewseventsIs eechI.ernan!e)+9++9+<a" df Bernan!e, Ben" 5)+9+6 =/tatement .y Ben /" Bernan!e, Chairman Board of 7overnors of the 1ederal 0eserve /ystem, .efore the 1inancial Crisis InFuiry Commission, 8ashington #C, /e tem.er )nd )+9+" %vaila.le online atR htt RIIfcic(static"law"stanford"eduIcdnTmediaIfcic( testimonyI)+9+(+;+)(Bernan!e" df, accessed ):th % ril )+99" Bernstein 0esearch" 5)+996 =7oldman /achsR %ssessing Litigation 0is!, 9st 2une )+99" %vaila.le online atR htt RIIonline"ws@"comI u.licIresourcesIdocumentsI+A+B99goldmandoc" df, accessed )9st 2uly )+99" Blair, Tony" 5)+9+6 =% 2ourney" 3utchinson, London"

100

Blair, Tony" 5)+996 =This much I !nowR Tony Blair" 8he <+server, 9)th 2une )+99" %vaila.le online atJ htt RIIwww"guardian"co"u!IlifeandstyleI)+99I@unI9)Itony.lair, accessed 9)th 2une )+99" Braithwaite, 2ohn" 5)++:6 =,eoli.eralism or 0egulatory Ca italism" %vaila.le online atJ htt RII a ers"ssrn"comIsol<I a ers"cfm>a.stractTidU*B:B*;, accessed 9*th March )+99" Buffet, 8arren" 5)++)6 =Ber!shire 3athaway Inc" )++) %nnual 0e ort" %vaila.le online atR htt RIIwww".er!shirehathaway"comI)++)arI)++)ar" df, accessed 9<th 2une )+99" Ca ucci, 'incent 0", and 0osner, Michael 3" 5)++*6 =/ee!ing /u. rime /olutionsR 1ed action, legislation and litigation address the su. rime mess, 8he !''= -lo+al $ecuritisation -uide, "9)(9<" %vaila.le online atR htt RIIwww"entwistle( law"comInewsI u.licationsI++++<;ITresIidUsaT1ile9I/&&4I,7D)+/UB$0IM& D)+/?LUTI?,/" df, accessed 9:th 2uly )+99" Carr, &dward" 5)++;6 % s ecial re ort on the future of finance, =7reed H and 1ear" 8he Econo/ist, ))nd 2anuary )++;" %vaila.le online atR htt RIIwww"economist"comInodeI9);:BB+;, accessed 9Ath May )+99" Cecchetti, /te hen 7" 5)++*6 =Monetary $olicy and the 1inancial Crisis of )++B()++*" %vaila.le online atR htt RIIfmwww".c"eduIec(@Isems)++*ICecchetti" df, accessed Ath 2uly )+99" Chancellor, &dward" 5)+996 =&ntranced .y Chinas .u..ling economy" 8he Financial 8i/es, Ath 1e.ruary )+99" %vaila.le online atR htt RIIwww"ft"comIintlIcmsIsI+I9<A+GABG(<+;)(99e+( ;de<(++9GGfea.dc+"htmlVaxCC98@T8)g4*, accessed 9Bth 2une )+99" Chen, /hiyin and Lin, LiCa" 5)++;6 =7lo.al Crisis ='astly 8orse Than 9;<+s, Tale. /ays 5U date 96" &loo/+erg, Bth May )++;" %vaila.le online atR htt RIIwww".loom.erg"comIa sInews> idUnewsarchivePsidUaxyo9 7;@+wsPreferUhome, accessed Ath 2une )+99" Christiano, Lawrence 2", 7ust, Christo her and 0oldos, 2orge" 5)+++6 =Monetary $olicy in a 1inancial Crisis" %vaila.le online atR htt RIIwww"imf"orgIexternalI u.sIftIstaff I)+++I++( ++Icgr" df, accessed 9Gth March )+99"

101

Clar!e, /imon" 5undated6 =The ,eoli.eral Theory of /ociety" The ideological foundations of neo(li.eralism" %vaila.le online atJ htt RIIwww"warwic!"ac"u!ISsyr.eI u.sI,eoli.eralism" df, accessed <rd % ril )+99" Co.urn, Tom" 5)+996 =/enate Investigations Committee 0eleases Levin(Co.urn 0e ort on the 1inancial Crisis" $ress 0elease, 9<th % ril )+99" %vaila.le online atR htt RIIhsgac"senate"govI u.licIindex"cfm> 1use%ctionU$ress"Ma@ority,ewsPContent0ecordTidU:9.f)cB;(:+:A(*+:;(BAa+( AABG;9Ae9<<d, accessed )Bth 2uly )+99" Congressional ?versight $anel for &conomic /ta.iliCation" 5)++*6 =The 1irst 0e ort of the Congressional ?versight $anel for &conomic /ta.iliCation, 9+th #ecem.er )++*" %vaila.le online atR htt RIIwww"huntonfiles"comIfilesIwe.u loadI1I0CTC?$T#ec9+Tre ort" df, accessed Gth %ugust )++9" Coval, 2oshua #", 2ure!, 2aco., and /tafford, &ri!" 5)++*6 =The &conomics of /tructured 1inance" 8or!ing $a er +;(+A+, 3arvard Business /chool" %vaila.le online atR htt RIIwww"h.s"eduIresearchI dfI+;(+A+" df, accessed 9<th 2une )+99" #atamonitor" 5)++*6 =Im act of the Credit Crunch on U4 Mortgage $roduct /tructures, 7 .ata/onitor &rief, 2uly )++*" %vaila.le online atR www"datamonitor"comIstoreI#ownloadIBrochureI> roductIdUB11/+A9G, accessed 99th %ugust )+99" #avidson, %dam" 5)++*6 =3ow %I7 fell a art, euters, 9*th /e tem.er )++*" %vaila.le online atR htt RIIwww"reuters"comIarticleI)++*I+;I9*Ius(how(aig(fell(a art( idU/M%0*:;B)B)++*+;9*, accessed 9Bth %ugust )+99" #unaway, /teven" 5)++;6 =7lo.al Im.alances and the 1inancial Crisis" Council on 1oreign 0elations, Centre for 7eoeconomic /tudies, Council / ecial 0e ort ,o" GG, March )++;" %vaila.le online atR htt RIIi"cfr"orgIcontentI u.licationsIattachmentsI7lo.alTIm.alancesTC/0GG" df, accessed <rd %ugust )+99" The &conomist" 5)++*6 =The 7reat Untangling, 8he Econo/ist, Ath ,ovem.er )++*" %vaila.le online atR htt RIIwww"economist"comInodeI9)::))+G, accessed 9Bth 2une )+99"

102

&dwards, Chris" 5)++:6 =The 7overnment and the 7reat #e ression" Cato Institute, Tax and Budget Bulletin, ,o"):" %vaila.le online atR htt RIIwww"cato"orgI u.sIt..It..(+:+*():" df, accessed )<rd 2uly )+99" &isinger, 2esse" 5)++*6 =The E:* Trillion &le hant in the 0oom" Portfoio.co/, 9:th ?cto.er )++*" %vaila.le online atR htt RIIwww" ortfolio"comIviewsIcolumnsIwall( streetI)++*I9+I9:ICredit(#erivatives(0ole(in(CrashI, accessed 99th %ugust )+99" &vans, #avid", and /alas, Caroline" 5)++;6 =1lawed Credit 0atings 0ea $rofits as 0egulators 1ail, Bloom.erg, );th % ril )++;" %vaila.le online atR htt RIIwww".loom.erg"comIa sInews> idUnewsarchivePsidUauGoIx"@udCGP, accessed ):th 2une )+99" 1erguson, ,iall" 5)++;6 =The 7reat 0e ression in 7ermany" %vaila.le online atR htt RIIwww"niallferguson"comIsiteI1&07ITem latesI%rticleItem"as x> ageidU)9), accessed 9Bth 2une )+99" 1erguson, ,iall" 5)+9+6 =Todays 4eynesians have Learnt ,othing" %vaila.le online atR htt RIIwww"niallferguson"comIsiteI1&07ITem latesI%rticleItem"as x> ageidU)<<, accessed 9Bth 2une )+99" 1erguson, ,iall" 5)+996 =,iall 1ergusonR =The left love .eing rovo!ed .y me """ they thin! IQm a reactionary im erialist scum.ag" 8he -uardian, 99th % ril )+99" %vaila.le online atR htt RIIwww"guardian"co"u!I.oo!sI)+99Ia rI99Iniall(ferguson( olitical(de.ate(england( america, accessed Bth 2uly )+99" 1ord, 8illiam 1reithaler" 5)++;6 =The %merican 0oots of Todays 7lo.al 1inancial Crisis" $a er resented to The $rogress 1oundation in Kurich, /witCerland on 9)th May )++;" %vaila.le online atR htt RIIwww" rogressfoundation"chI$#1IreferateI)9+TLecture D)+8illiamD)+1ordT9)"+:")++;" df, accessed 9*th 2uly )+99" The 1inancial Crisis InFuiry 0e ort, 1inal 0e ort of the ,ational Commission on the Causes of the 1inancial Crisis and &conomic Crisis in the United /tates" /u.mitted .y the 1inancial Crisis InFuiry Commission, 2anuary )+99" %vaila.le online atR htt RIIwww"g oaccess"govIfcicIfcic" df, accessed 9Gth 2une )+99" 1ishman, /teve" 5)++*6 =Burning #own 3is 3ouse" ,ew -or! MagaCine, <+th ,ovem.er )++*" %vaila.le online atR htt RIInymag"comInewsI.usinessI:)A+<I, accessed 9Ath 2uly )+99"
103

1retC, Lewis %" 59;B<6 =U ton /inclair and the 0ed #ecade, Political $cience, ):5)6R 9<9( 9G<" 1riedman, Ben@amin M" 5)++*6 =8hy a #ual Mandate is 0ight for Monetary $olicy" ,nternational Finance, 995)6R "9:<(9A:" %vaila.le online atR htt RIIwww"economics"harvard"eduIfacultyIfriedmanIfilesI8hyD)BaD)BdualD)Bmandate D)BisD)BrightD)BforD)BmonetaryD)B olicy" df, accessed *th 2uly )+99" 1ull.roo!, &dward" 5)++<6 =The crisis in economics" The ost(autistic economics movementR the first A++ days" 1ull.roo!, &dward" 5)++:6 =&conomics and ,eoli.eralism" %vaila.le online atJ htt RIIwww" aecon"netI1ull.roo!I&conomicsand,eoli.eralism" df, accessed 2une <rd )+99" 1u!uyama, 1rancis" 5)+996 =1riedrich %" 3aye!, Big(7overnment /!e tic, 8he 4ew 5ork 8i/es, Ath May )+99" %vaila.le online atR htt RIIwww"nytimes"comI)+99I+:I+*I.oo!sIreviewIf(a(haye!(.ig(government(s!e tic"html> agewantedUall, accessed ;th %ugust )+99" 7oldstein, Matthew" 5)++*6 =Merrills %I7 $ro.lem" &loo/+erg &usinessweek, 9Ath /e tem.er )++*" %vaila.le online atR htt RIIwww".usinesswee!"comIinvestingIinsightsI.logIarchivesI)++*I+;ImerrillsTaigT ro.le m"html, accessed 9Bth %ugust )+99" 7ordon, 7reg" 5)++;6 =3ow 7oldman /ecretly Bet on the U"/" 3ousing Crash, 0cClatchy, 9st ,ovem.er )++;" %vaila.le online atR htt RIIwww"mcclatchydc"comI)++;I99I+9IBBB;9Ihow(goldman(secretly(.et(on(the"html, accessed 9B %ugust )+99" 7reens an, %lan" 5)+9+6 =Testimony of %lan 7reens an, 1inancial Crisis &nFuiry Commission, )Bth % ril )+9+" %vaila.le online atR htt RIIwww"ft"comIintlIcmsI:fedBG<e( G)B*(99df(*cA+(++9GGfea.dc+" df, accessed <rd %ugust )+99" 7regosC, #avid" 5)+9+6 =The 1inancial and &conomic CrisesR % Threat to the /ocial Mar!et &conomy" $ "):)()AA in A+ -ears of /ocial Mar!et &conomyJ formation, develo ment and ers ectives of a eace ma!ing formula" %vaila.le online atR htt RIIwww"!as"deIwfIdocI!asT)++G+(:GG()(<+" dfP9++A<+9AGA:G, accessed 9*th May )+99"
104

7ross, #aniel" 5)+9+6 =&ve of #estruction" 4ew 5ork 8i/es, 9Ath % ril )+9+" %vaila.le online atR htt RIIwww"nytimes"comI)+9+I+GI9*I.oo!sIreviewI7ross(t"html> agewantedUall, accessed 9Bth May )+99" 7runwald, Michael" 5)++;6 =$erson of the -ear )++;" 8i/e 0aga;ine, 9Ath #ecem.er )++;" %vaila.le online atR htt RIIwww"time"comItimeIs ecialsI ac!agesIarticleI+,)**+G,9;GA<B:T9;GB):9T9;GB:)+,++" html, accessed ):th 2uly )+99" 3agelW!en, %lexander" 5)++;6 =?ld /chool is BestR % 7ood #ose of ?rdoli.eralism Could 7uide us ?ut of the 1inancial Crisis, The %tlantic Times, a Monthly ,ews a er from 7ermany, March )++;" %vaila.le online atR htt RIIwww"atlantic( times"comIarchiveTdetail" h >recordI#U9AA<, accessed (>th 7pril !'((. 3ouses Committee on ?versight and 7overnment 0eform 5)++*6, 3ouse of 0e resentatives, ?ne 3undred Tenth Congress, /econd /ession, ?cto.er ))nd )++*" =Credit 0ating %gencies and the 1inancial Crisis" %vaila.le online atR htt sRIIhouse"resource"orgI99+Iorg"c( s an")*9;)G(9" df, accessed 9Ath 2uly )+99" 3ermann, Christo h" 5)++B6 =,eoli.eralism in the &uro ean Union" %vaila.le online atR htt RIIwww"iaF"uni(due"deIa!tuellIveroeffI)++:Idynamo+:" df, accessed Bth May )+99" 3olt, 2eff" 5)++;6 =% /ummary of the $rimary Cause of the 3ousing Bu..le and the 0esulting 1inancial CrisisR % ,on(Technical $a er, The 2ournal of Business &nFuiry, *596R9)+(9);" Inflation vs" 110 7ra h" 5)+9+6" %vaila.le online at, www"icmarc"orgIImageCacheIrcIcontentImar!etviewIchartI)++:I)++:99+Ginflationinterestrat esT)ecttIv)IimageT:.TG+idT<dT))chartT))T:dI9I)++:99+Ginflationinterestra"gif, accessed Bth %ugust )+99" Ireland, $addy" 5)+996 =Law and the neoli.eral visionR financial ro erty, ension, rivatisation and the ownershi society, 4orthern ,reland Legal ?uarterly, A)596R 2acFues, Martin" 5)++;6 =The ,ew #e ression" 4ew $tates/an, 9)th 1e.ruary )++;" %vaila.le online atR htt RIIwww"newstatesman"comIeconomyI)++;I+)Ifinancial(crisis(china( .an!s, accessed 9Ath May )+99" "9(<)"

105

2estaedt, Thomas and $ollard, Marcus" 5)+9+6 =The % 95G6R "<G*(<:A"

lication of &uro ean Com etition

Law in the 1inancial /ervices /ector, 2ournal of &uro ean Com etition Law and $ractice,

4elly, 2ac!" 5)++*6 =1rom a 0etired Ban!erR 2ac! 4elly" %vaila.le online atR htt RIIwww"sodahead"comIunited(statesIfrom(a(retired(.an!er(@ac!(!ellyI.log(9B;<:I, accessed 9Bth 2uly )+99" 4ennedy, #avid M" 59;;;6 =1reedom 1rom 1earR The %merican $eo le in #e ression and 8ar, 9;);(9;G:, ?xford 3istory of the United /tates, ?xford University $ress, Inc", ,ew -or!, ,ew -or!" 4eynes, 2ohn Maynard" 59;<A6 =The 7eneral Theory of &m loyment, Interest and Money, Classic Boo!s %merica, ,ew -or!, ,ew -or!" 4iviat, Bar.ara" 5)++;6 =% Brief 3istory ?fR 0ating %gencies, 8i/e 0aga;ine, 9;th March )++;" %vaila.le online atR htt RIIwww"time"comItimeImagaCineIarticleI+,;9B9,9**A::;,++"html, accessed )Gth %ugust )+99" 4Xhler, &!!ehard %", and 3offmann, %ndreas" 5)+9+6 =Causes and 0egulatory ConseFuences of the 1inancial Mar!ets Crisis" $ "))A():9 in A+ -ears of /ocial Mar!et &conomyJ formation, develo ment and ers ectives of a eace ma!ing formula" %vaila.le online atR htt RIIwww"!as"deIwfIdocI!asT)++G+(:GG()(<+" dfP9++A<+9AGA:G, accessed 9*th May )+99" 4roes, ,eelie" 5)++;6 =8hy 8e ,eed Com etitive Mar!ets" Conference on =Com etition, $u.lic $olicy and Common Man, 9Ath ,ovem.er )++;, #elhi" %vaila.le online atR htt RIIec"euro a"euIcom etitionI u.licationsIwee!lyTnewsTsummaryI)++;T99T)+"htm, accessed 9Bth 2uly )+99" La.onte, Marc" 5)+996 =Changing the 1ederal 0eserves MandateR %n &conomic %nalysis" Congressional 0esearch /ervice 0e ort for Congress, re ared for mem.ers and committees of Congress" %vaila.le online atR htt RIIwww"fas"orgIsg IcrsImiscI0G9A:A" df, accessed Ath May )+99"

106

Levin, Carl" 5)+9+6 =Inside 2o., Inside 2o. transcri t, /ony $ictures, /e tem.er )+9+" %vaila.le online atR htt RIIwww"sonyclassics"comIawards( informationIinside@o.Tscreen lay" df, accessed 9Gth 2uly )+99" Lewis, Michael" 5)++*6 =The &nd, Portfolio.co/, 99th ,ovem.er )++*" %vaila.le online atR htt RIIwww" ortfolio"comInews(mar!etsInational(newsI ortfolioI)++*I99I99IThe(&nd(of( 8all(/treets(BoomIindex)"html, accessed 9A May )+99" List, 2ohn %" 5)++G6 =The Behavioralist Meets the Mar!etR 0easuring $ocial Preferences and eputation Effects in 7ctual 8ransactions" %vaila.le online atR htt RIIwww"econ"yale"eduIseminarsIa microIam+GIlist(+G+;9A" df, accessed 9;th %ugust )+99" Lothian, 2ames 0" 5)++;6 =U"/" Monetary $olicy and the 1inancial Crisis" 8he :ournal of Econo/ic 7sy//etries, A5)6R):(G+" %vaila.le online atR htt RII@amesrlothian"comImediaILothianTMoneyTinTCrisisT2&%" df, accessed 9;th March )+99" Lyons, &ugene" 59;G96 =The 0ed #ecadeR The /talinist $enetration of %merica, The Bo.s( Merrill Com any, Indiana olis, ,ew -or!" Manne, 0o.ert" 5)+9+6 =#eath throes of the neo(li.eral delusion" %vaila.le online atR htt RIIwww"theaustralian"com"auInewsIo inionIdeath(throes(of(the(neo(li.eral( delusionIstory(eAfrgACo(9)):*:9A;B<B:, accessed 9<th 2une )+99" Masters, Blythe" 5)++*a6 =The 7reat UntanglingR /ome of the criticism hea ed on credit( default swa s is misguided" The mar!et needs sorting out nonetheless, 8he Econo/ist, Ath ,ovem.er )++*" %vaila.le online atR htt RIIwww"economist"comInodeI9)::))+G, accessed Bth %ugust )+99" Masters, Blythe" 5)++*.6 =The woman who .uilt financial =wea on of mass destruction, 8he -uardian, )+th /e tem.er )++*" %vaila.le online atR htt RIIwww"guardian"co"u!I.usinessI)++*Ise I)+Iwallstreet".an!ing, accessed 9*th 2une )+99" Mc0ae, 3amish" 5)++*6 =The %scent of Money, By ,iall 1erguson" The 7uardian, <9st ?cto.er )++*"

107

Mirows!i, $hili and $lehwe #ieter" 5)++;6 =The 0oad from Mont $Ylerin" The ma!ing of neoli.eral thought collective" Morgenson, 7retchen" 5)++*6 =3ow the Thunderinh 3erd 1altered and 1ell, 8he 4ew 5ork 8i/es, *th ,ovem.er )++*" %vaila.le online atR htt RIIwww"nytimes"comI)++*I99I+;I.usinessI+;magic"html>nUTo I0eferenceITimes D)+To icsI$eo leI?I?,eal,D)+&"D)+/tanley>refUestanleyoneal, accessed 9:th %ugust )+99" Mur hy, 0o.ert $" 5)++B6 =The 8orst 0ecession in ): years> 0ises .aily, Monday 9st ?cto.er )++B" %vaila.le online atR htt RIImises"orgIdailyI)B)*, accessed 9Ath 2une )+99" Mur hy, 0o.ert $" 5)++*6 =#id the 1ed Cause the 3ousing Bu..le> 0ises .aily, Monday 9Gth % ril )++*" %vaila.le online atR htt RIImises"orgIdailyI);<A, accessed 9Ath 2une )+99" The ,ational Bureau of &conomic 0esearch" 5)++*6 =#etermination of the #ecem.er )++B $ea! in &conomic %ctivity" Business Cycle #ating Committee, announced 9st #ecem.er )++*" %vaila.le online atR htt RIIwww"n.er"orgIcyclesIdec)++*"html, accessed 9Bth 2une )+99" ,eate, 0u ert" 5)+996 =0ating agencies suffer =conflict of interest, says former Moodys .oss" The 7uardian, ))nd %ugust )+99" %vaila.le online atR htt RIIwww"guardian"co"u!I.usinessI)+99IaugI))Iratings(agencies(conflict(of(interest, accessed )Bth %ugust )+99" ,is!anen, 8illiam %" 5)++;6 =3ow to Turn a #e ression into a 0ecession" Cato Institute, Cato $olicy 0e ort, ,o" )" %vaila.le online atR htt RIIwww"cato"orgI u.sI olicyTre ortIv<9n)Ic r<9n)(9" df, accessed 9Ath 2une )+99" ,ofsinger, 2"0" 5)++96 =The Im act of $u.lic Information on Investors, :ournal of &anking and Finance, ):" ,ofsinger, 2"0" 5)++:6 =The $sychology of Investing, 9st &dition, $earson &ducationI$rentice 3all" ?lson, 4"0" 5)++A6 =% Literature 0eview of /ocial Mood, :ournal of &ehavioural Finances, B" $alley, Thomas I" 5)++G6 =1rom 4eynesianism to ,eoli.eralismR /hifting $aradigms in &conomics" %vaila.le online atR
108

htt RIIwww"thomas alley"comIdocsIarticlesImacroT olicyI!eynsianismTtoTneoli.eralism" df, accessed 9Bth % ril )+99" $ar!er, 8ayne #", and $rechter, 0o.ert 0" 5undated%6 =3erdingR %n Interdisci linary Integrative 0eview from a /ocionomic $ers ective" %vaila.le online atR htt RIIwww"socionomics"orgI dfIherdingTintegrativereview" df, accessed <rd /e tem.er )+99" $ar!er, 8ayne #", and $rechter, 0o.ert 0" 5undatedB6 =The 1inancialI&conomic #ichotomy in /ocial Behavioural #ynamicsR The /ocionomic $ers ective" %vaila.le online atR htt RIIwww"elliottwave"comIsingleTissuesI dfI2B1T1inancial(&conomic(#ichotomy" df, accessed <rd /e tem.er )+99"

$esendorder, #" )+9+" =?vercoming /ystemic 1inancial 0is!s in &uro eR Contested $olicy 0es onses" $etersen, M" %", Mu!uddem($etersen 2", #e 8aal, B", /enosi, M" C", and Tomas /" 5)+996 =$rofit and 0is! under /u. rime Mortgage /ecuritiCation" %vaila.le online atR htt RIIdownloads"hindawi"comI@ournalsIddnsI)+99I*G;<G)" df, accessed 9Bth 2uly )+99" $hilli s, 0onnie 2" 59;;:6 =The Chicago $lan and ,ew #eal Ban!ing 0eform" M" &" /har e, Inc", *+ Business $ar! #rive, %rmon!, ,ew -or! 9+:+G" $rager, #ennis" 5undated6 =The Bigger the 7overnment the /maller the CitiCen" %vaila.le onlined atR htt RIIwww" rageru"comIdocumentsIThe(.igger(the(7overnment(the(smaller(the( citiCen" df, accessed 9Bth 2une )+99" $rechter, 0o.ert 0" 59;;;6 =The 8ave $rinci le of 3uman /ocial Behaviour and the ,ew /cience of /ocionomics, ,ew Classics Li.rary" 0a@an, 0aghuram" 5)++:6 =3as 1inancial #evelo ment Made the 8orld 0is!ier> %vaila.le online atR htt RIIwww"!c"fr."orgI$UBLIC%TI/-M$?/I)++:I dfI0a@an" a er"+*+G" df, accessed <rd May )+99" 0edhead, 4eith" 5)++*6 =1inancial %dvisers and Their ClientsR Can There Be a Meeting of Minds> %vaila.le online atR

109

htt RIIcw"routledge"comItext.oo!sI;B*+G9:G)*A)+IdownloadsIadvisers" df, accessed <rd 2une )+99" 0eidy, Bridget", /herman, #an", and Beal, Travis" 5)+9+6 =7reens ans 1ed and the 1inancial Crisis" %vaila.le online atR htt RIIricardo"ecn"wfu"eduIScottrellIecn)B)I7reens anTfinal"doc, accessed 9Ath 2uly )+99" 0einhart, Carmen M", and 0ogoff, 4enneth /" 5)++*a6 =Is the )++B /u.($rime 1inancial Crisis /o #ifferent> %n International 3istorical Com arison" %merican &conomic 0eview, ;* 5)6R <<;(<GG"

0einhart, Carmen M", and 0ogoff, 4enneth /" 5)++*.6 =This Time is #ifferentR % $anoramic 'iew of &ight Centuries of 1inancial Crises" %vaila.le online atR htt RIIwww"n.er"orgISw.uiterIcr9" df, accessed 9Ath 2uly )+99" 0itholtC, Barry" 5)++;6 =Casting Blame, $art II" %vaila.le online atR htt RIIdailyrec!oning"comIcasting(.lame( art(iiI, accessed 9+th %ugust )+99" 0itholtC, Barry", Tas!, %aron, Tas!", and 1lec!enstein, Bill" 5)++;6 =Bailout ,ation, 2ohn 8iley P /ons, Inc", 3o.o!en, ,ew 2ersey" 0o.erts, Lawrence" 5)++*6 =The 7reat 3ousing Bu..leR 8hy #id 3ouse $rices 1all> Monterey Cy ress $u.lishing" 0oosevelt, 1ran!lin #" 59;<<6 =Inaugural %ddress, Gth March 9;<<" %vaila.le online atR htt RIIwww" residency"ucs."eduIwsIindex" h > idU9GGB<VaxCC9/xF:+@,I, accessed 9*th 2uly )+99" 0ou.ini, ,ouriel" 5)++:6 =8hy Central Ban!s /hould Burst Bu..les" %vaila.le online atR htt RIIwe.(docs"stern"nyu"eduIsalomonIdocsIcrisisIBu..lesD)+andD)+Monetary D)+D)+$olicyD)+(D)+0ou.ini" df, accessed ):th May )+99" 0ude, Christo her" 5)++;6 =The 8orld &conomic Crisis and the 1ederal 0eserves 0es onse to ItR %ugust )++B(#ecem.er )++*" %vaila.le online atR
110

htt RIIwww" eri"umass"eduIfileadminI dfIconferenceT a ersI/%1&0I0udeT8orldT&conomi c" df, accessed Ath % ril )+99" 0ydstrom, 0ichard I" 5undated6 =The ,ational Mortgage Meltdown and the Colla se of the /hadow Ban!ing /ystem" ?nline availa.le atR htt RIIshadow.an!ingsystem"comI/tTU/%Today(0ydstrom;(9G(+B1inal8&B()" df, accessed <rd May )+99" /ally, 0aCeen" 59;;A6 =?rdoli.eralism and the /ocial Mar!etR Classical $olitical &conomy from 7ermany, 4ew Political Econo/y, 95)6R )<<():B" /eyfried, Bill" 5Undated6 =Monetary $olicy and 3ousing Bu..lesR % Multinational $ers ective" %vaila.le online atR htt RIIwww"aa.ri"comI?C+;manuscri tsI?C+;+99" df, accessed Ath %ugust" /hiller, 0o.ert 2" 5)++:6 =Irrational &xu.erance" $rincetown, ,ew @erseyR $rinceton University $ress" /hiller, 0o.ert 2" 5)++*6 =The /u. rime /olutionR 3ow Todays 7lo.al 1inancial Crisis 3a ened and 8hat to #o a.out It. $rinceton, ,ew 2erseyR $rinceton University $ress" /inclair, U ton" 59;<:6 =I, Candidate for 7overnorR %nd 3ow I 7ot Lic!ed" @niversity of California Press" /inn, 3ans(8erner" 5)++;6 =/tuffing the 7oose /trategy" %vaila.le online atR htt RIIwww"voxeu"orgIindex" h >FUnodeI<G9<, accessed 9*th 2une )+99" /loan, %llan" 5)++B6 =2un! Mortgages Under the Microsco e, Fortune, 9Ath ?cto.er )++B" %vaila.le online atR htt RIImoney"cnn"comI)++BI9+I9:Imar!etsI@un!Tmortgages"fortuneIindex"htm> ostversionU)++B9+9A+;, accessed 9Ath %ugust )+99" /mith, %dam" 5)++< Z9BBA[6 =The 8ealth of ,ations" 0e rinted with Introduction .y %" 4ruger" ,ew -or!R Bantam #ell Boo!s 50andom 3ouse6"
111

/mith, &lliot Blair" 5)++*6 =Bringing #own 8all /treet as 0atings Let Loose /u. rime /courge, &loo/+erg, )Gth /e tem.er )++*" %vaila.le online atR htt RIIwww".loom.erg"comIa sInews>sidUah*<;I8TL$;sP idUnewsarchive, accessed 9;th 2uly )+99" /oros, 7eorge" 5)+9+6 =The Crisis and the &uro" 8he 4ew 5ork eview of &ooks, 9;th %ugust )+9+" %vaila.le online atR htt RIIwww"ny.oo!s"comIarticlesIarchivesI)+9+IaugI9;Icrisis( euroI> ageU9, accessed 9*th %ugust )+99" / annaus, ,ancy" 5)+9+6 =The Constitutional /olution to 7oldman /achs Criminality, &I0 &conomics, Bth May )+9+R accessed )*th 2uly )+99" /taff 0e ort, )++;" U/ 3ouse of 0e resentatives, 999th Congress" Committee on ?versight and 7overnment 0eform" =The 0ole of 7overnment %fforda.le 3ousing $olicy in Creating the 7lo.al 1inancial Crisis of )++*" 2uly Bth )++;" %vaila.le fromR htt RII.log"heritage"orgIw (contentIu loadsI)++;I+BIB(B(+;(housing(crisis(re ort" df Zaccessed 99th #ec )+9+[" /tar!, 2Wrgen" 5Undated6 =Low $olicy Interest 0atesR Too Low for Too Long is Unhealthy" %vaila.le online atR htt RIIwww"ec."intIeventsIconferencesIsharedI dfImacroecim ILowT olicyTinterestTratesTfr omT.oonTtoT.ane" df>:A9Aa:aBG):+*+AAcB;B+:Ae<c:*ea9<, accessed Bth %ugust )+99" /teger, Manfred B" and 0oy, 0avi 4" 5)+9+6 =,eoli.eralismR a very short introduction" htt RII.oo!s"google"comI.oo!s> idUaBgL7a1:2m-CP rintsecUfrontcoverPsourceUg.sTgeTsummaryTrPcadU+VvUone age PFPfUfalse /tein, 8illie" 5)+9+6 =7oing where the action isR ,eoli.eralisn, 1oreign Intervention, and the %ction 1ilm 3ero, Cultural Landscapes, 95G6R esICulturalTLandsca esI'olumeD)+9D)+Issue D)+GICulturalTLandsca esT9TGT)+9+T#" df, accessed 9Gth 2une )+99"
112

" )A(<+" %vaila.le online atR

htt RIIwww"larouche u."comIeiwI u.licI)+9+I)+9+T9+(9;I)+9+(9*I dfI)A(<+T<B9*" df,

"A:(9+*" %vaila.le online atR

htt RIIwww"colum"eduI%cademicsI3umanitiesT3istoryTandT/ocialT/ciencesICulturalT/tudi

/tutch.ury, Michael" 5)+9+6 =7ood.ye to the notion neo(li.eralism caused the financial crisis" 8he 7ustralian, 9Bth % ril )+9+" %vaila.le online atR htt RIIwww"theaustralian"com"auInewsIo inionIgood.ye(to(the(notion(neo(li.eralism(caused( the(glo.al(financial(crisisIstory(eAfrgACo(9)):*:GG+;*)+, accessed Bth May )+99" /underland, 0uth" 5)++;6 =They had arties, we got the hangover" The ?.server, /unday Bth 2une )++;" %vaila.le online atR htt RIIwww"guardian"co"u!I.oo!sI)++;I@unI+BIfools(gold( gillian(tett, accessed :th 1e.ruary )+99" /underland, 0uth" 5)+9+6 =1our years that shoo! the financial world" 8he <+server, /unday );th %ugust )+9+" %vaila.le online atR htt RIIwww"guardian"co"u!I.usinessI)+9+IaugI);Ifour( years(that(shoo!(the(world, accessed :th 1e.ruary )+99" /u reme Court of the /tate of ,ew -or!, County of ,ew -or!" 5)+996 %llstate Insurance Com any, %llstate Life Insurance Com any, %llstate Ban! 51I4I% %llstate 1ederal /avings Ban!6, %llstate Life Insurance Com any of ,ew -or!, %gents $ension $lan, and %llstate 0etirement $lan, Plaintiffs H against H Merrill Lynch P Co", Merrill Lynch, $ierce, 1enner P /mith Inc", Merrill Lynch Mortgage Investors, Inc", and Merrill Lynch Mortgage Lending, Inc", .efendants" 1iledR ,ew -or! County Cler! +9I+<I)+99" %vaila.le online atR htt RIIwww"orric!"comIfileu loadI<G9:" df, accessed *th %ugust )+99" /ylla, 0ichard" 5)++96 =% 3istorical $rimer on the Business of Credit 0atings" $re ared for conference on =The 0ole of Credit 0e orting /ystems in the International &conomy, The 8orld Ban!, 8ashington, #C, March 9(), )++9" %vaila.le online atR htt RIIwww9"world.an!"orgIfinanceIassetsIimagesI3istoricalT$rimer" df, accessed 9*th %ugust )+99" Taylor, 2ohn B" 5)++B6 =3ousing and Monetary $olicy" 1ederal 0eserve Ban! of 4ansas Citys /ym osium on 3ousing, 3ousing 1inance and Monetary $olicy, 2ac!son 3ole, 8yoming" %vaila.le online atR htt RIIwww"!c"fr."orgI$UBLIC%TI/-M$?/I)++BI$#1I)++B"+;"+G"Taylor" df, accessed )nd %ugust )+99" Taylor, 2ohn B" 5)++;6 =3ow 7overnment Created the 1inancial CrisisR 0esearch shows the failure to rescue Lehman did not trigger the fall anic" The 8all /treet 2ournal, ;th 1e.ruary )++;" %vaila.le online atR htt RIIonline"ws@"comIarticleI/B9)<G9G<9+)*+:A9;G:"html, accessed :th %ugust )+99"
113

Taylor, 2ohn B" 5)+9+6 =Macroeconomic Lessons from the 7reat #eviation" 0emar!s at the ):th ,B&0 Macro %nnual Meeting" %vaila.le online atR htt RIIwww"stanford"eduIS@ohntaylI,B&0Macro%nnualTal!1inal" df, accessed 9Bth %ugust )+99" Tett, 7illian" 5)+9+a6 =Brea!fast with the 1TR ,ouriel 0ou.ini" 8he Financial 8i/es, Bth May )+9+" %vaila.le online atR htt RIIwww"ft"comIintlIcmsIsI)I)c.:G<cc(:;:.(99df(;;.a( ++9GGfea.G;a"htmlVaxCC90-+2<0u!, accessed Bth March )+99" Tett, 7illian" 5)+9+.6 =1ools 7oldJ how unrestrained greed corru ted a dream, shattered glo.al mar!ets and unleashed a catastro he" %.acus, 7reat Britain" Tett, 7illian" 5)+996 =1rom the su. rime to the ridiculous" 8he Financial 8i/es, Bth 2anuary )+99" %vaila.le online atR htt RIIwww"ft"comIintlIcmsIsI+I+)*<Gec*(9*:f(99e+(**c;( ++9GGfea.G;a"htmlVaxCC9'mt@2M!#, accessed Bth 2anuary )+99" Thain, 2ohn" 5)++;6 =2ohn ThainR Its =Unfortunate That the %merican #ream 3as Been #emoniCed" %vaila.le online atR htt RII!nowledge"wharton"u enn"eduI a ersIdownloadI+;<++;TthainT art9" df, accessed 9Bth 2uly )+99" Thornton, Mar!" 5undated6 =The &conomics of 3ousing Bu..les" %vaila.le online atR htt RIImises"orgI@ournalsIscholarIThornton9<" df, accessed <+th 2uly )+99" Tomlinson, 0ichard", and &vans #avid" 5)++B6 =C#? Boom Mas!s /u. rime Losses, %.etted .y /P$, Moodys, 1itch" &loo/+erg, <9st May )++B" %vaila.le online atR htt RIIwww".loom.erg"comIa sInews> idUnewsarchivePsidUa@sBBF7GT\*I, accessed 9;th %ugust )+99" 8all /treet 2ournal" 5)+996 Bac! age advertisement .y $print" )Gth 2une )+99, age %9G" Learn more at s rint"comIcom etition" 8axman, 3enry" 5)++*6 =Credit 0ating %gencies and the 1inancial Crisis, 3earing of the 3ouses Committee on ?versight and 7overnment 0eform, ?cto.er ))nd )++*" %vaila.le online atR htt sRIIhouse"resource"orgI99+Iorg"c(s an")*9;)G(9" df, accessed Bth 2uly )+99"

114

8illiams, 8alter &" 5)+9+6 1oreword to =The 0oad to /erfdomJ with The Intellectuals and /ocialism" The condensed version of the oad to $erfdo/ .y 1"%"3aye! as it a eared in the % ril 9;G: edition of eader#s .igest. I&%, London, 7reat BritianR 3o..s the $rinters" 8halen, Christo her" 5)+996 =8hy ,ouriel 0ou.ini and all of us are wrong a.out 4arl Marx, euters.co/, 9:th %ugust )+99" %vaila.le online atR htt RII.logs"reuters"comIchristo her(whalenI)+99I+*I9:Iwhy(nouriel(rou.ini(and(all(of(us( are(wrong(a.out(!arl(marxI, accessed 9Ath %ugust )+99" 8olf, Martin" 5)+9+6 =Inside 2o., Inside 2o. transcri t, /ony $ictures, /e tem.er )+9+" %vaila.le online atR htt RIIwww"sonyclassics"comIawards( informationIinside@o.Tscreen lay" df, accessed 9Gth 2uly )+99"

115