Inside Job: Storyville
After watching the documentary on "Inside Job: Storyville" which explained how the global financial crises occurred in 2008, I am absolutely amazed by the levels of corruption and greed which have riddled the American banking and political system. I feel shocked at the extremes to which many of the leading figures on Wall Street and in Washington itself went to ensure their own pockets were filled to the brim, taking home millions in bonuses and how they conned many of America's working class out of billions of dollars, which later would have a huge snowball effect plummeting the world into a global recession leaving countries trillions in debt. There are a few key areas which I would like to look into where these huge investment banks really took the biscuit.
Iceland and deregulation:
Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. In 2000 the Icelandic government instructed a broad policy of deregulation to occur, when the country was in a utopia position. In mine and many other people's eyes they had the complete package, a stable democracy, low government debt, clean energy, good health care/ education and a low crime rate. Now when I read that statement it's hard to comprehend why you would want to change any of that, but when Iceland's 3 largest banks were privatised by the government you can blatantly see where things start to go pear shaped. When looking back you could say it was one of the purest forms of deregulation, what really stunned me was the fact it lead to the banks borrowing $120 billion over a 5 year period, now I'm no economist but surely they are crazy numbers.
I personally feel it is in this time period in which the Icelandic government and regulators really screwed over the Icelandic people. It allowed for the creation of a bubble and the eventual collapse of Iceland's economy. The bankers showered money on themselves, each other and basically whatever they wanted they bought. Then all of a sudden the American's come bulldozing in which is no real surprise with their accountancy agencies and credit rating agencies, who looked into the banks and found there was nothing to be concerned about. The Icelandic regulators then improved the banks ratings to triple A status which is the highest rating, allowing ultimately for greater risk. In reality it's a pretty disgusting and evil story, the public trusted the banks to keep their money safe because that's what banks are there to do, however when the money was gone and the banks went bust, many people lost their entire life savings. Somehow the exact same thing was happening on Wall Street just on a cataclysmic scale and the documentary gave me a real inside into how this all occurred.
America and deregulation:
Now this is where the real fun begins, Wall Street. An industry which will either make you filthy stinking rich or leave you penniless. Prior to the 1980's banks were regulated, which meant they were owned by a few investors who had to provide the capital for the bank to work, they would never "bet the ranch" and risk losing everything. A good system right? It allowed for economic growth over a 40 year period and things were looking up, however from the 80's onwards investment banks went public and people on Wall Street got rich.
From the documentary it really opened up my eyes to the greed and addiction people had when it came to making money, combine this alongside a system which is so corrupt it encouraged the banks to take these risks then you blatantly have a recipe for disaster. In a brief overview of the problem basically around 4 of Americas main banks and a few insurance companies worked together to make massive private gains off public losses. The merger of some of these businesses increased the risk as more and more ways of making money were formed.
Banks such as the Lehman brothers, Merrill Lynch and Morgan Stanley were just a few of the big names who were involved in the vast level of corruption. It seemed to start in 1981 with President Reagan then carried on with Clinton, Bush, Bush again and now Obama who have all adopted the idea of deregulation and allowed the financial sector to consolidate into a few huge financial firms. The employment of the same people who made millions off deregulation either as board members, CEO's or Lectures for the top universities in America are now the ones in political power as advisors or head of the federal reserve, so yeah you may see where the problems lie. Now when a CEO sells his shares of a bank for over $450 million to go and work for the government do you really think he cares what happens to the people's money that he risked? Hell no. He's just interested in keeping his friends rich and ensuring he won't get the blame when the s*** hits the fan and inevitably that's exactly what happened.
Prior to the financial recession hitting in 2008 the real problem was investment banks borrowing heavily in order to buy more loans and create more CDO's, such as mortgages, bonds and loans in which they would sell to the public and make a ton of money. The amount of leverage which these banks now had was ridiculous. Then came along derivatives, combined with CDO's and subprime lending and you have deals being done which would be upwards of $100 million. These incentives encouraged the bankers to take more risks as they could walk away with millions in bonuses. The video actually made me feel sad at how people could have such lack of morals, selling stocks to people which were literally worthless and then betting on them to fail is just so wrong on so many different levels.
The real turning point in the documentary for me is the economic paper published by the IMF's chief economist Raghuram Rajan which was presented to the leading central bankers of the world, the likes of Greenspan and Summers who were the head of firms and government correspondents which opposed any regulations on banks and encouraged deregulation, they basically criticised the paper and went against any advice given in order to make millions. I felt from this point that if people at the top of the industry don't care about the possible financial collapse of the world then what hope is there for the rest of us, the power of money really shines through in this documentary and shows how everyone has their price- along with the grand scale of corruption in Washington.
Key factors in the build up to the recession
Firstly in as early as 2004 the FBI had raised concern about an epidemic of mortgage fraud, they reported inflated appraisals, fake supporting loan documentation and other fraudulent activity.
Secondly in 2005 the IMF's chief economist Raghuram Rajan wrote the paper on how firms are risking too much and could potentially destroy their own company and indeed the world's economy as we know it.
Thirdly in 2006 came Nouriel Robini's warnings of the bubble which has already been created.
2007 was Allan Sloan's newspaper articles on Subprime lending and the effects it would have. There was a also a Powerpoint called "What's in the bag?" which explained the impact which the bubble has has and the aftermath of it once it pops.
These key factors which all come from reliable sources were just turned away, discarded as if they were written by a fool. I honestly can't believe how many people were so arrogant and stupid but I suppose that's what money does to people, and when you have many of these people together on one street the greed is catalysed on a colossal scale.
To be honest the sad reality is that it's the poorest people who suffered the most from all this corruption, the senior management of the firms supply massive financial aid to political representatives, firms would sell a product to a customer then bet against the same product because they knew it wouldn't make money and board members would be given multi million dollar bonuses. I can't comprehend how this went on for so long and how it actually is still going on today.
