Yves Smith, author of the book, Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, and blogger at the website Naked Capitalism, is not usually prone to angry outbursts.
But Obama’s assertion (while talking to Jon Stewart on the Daily Show yesterday) that the recent financial crisis cost less than the S&L crisis of the 1980s, really provoked her.
“Obama claims the cost of this crisis will be less than 1% of GDP, versus 2.5% for the savings and loan crisis.” On the contrary, according to Smith, the total cost of cleaning up the S&L mess was on the order of $150 billion,while the full cost of our current crisis is something like one to five times total GDP! This is, of course, in the tens of trillions.
” … if you want a better tally of the true costs of the financial crisis, the Bank of England’s Anthony Haldane comes up with much greater damage, precisely because he also considers the costs citizens know all too well, such as painfully high unemployment and drastic state and local government budget cuts. He estimates the cost of the global financial crisis, when you include the biggest item, output losses, at one to five times global GDP.”
We are having, she says:
” … a slow motion train wreck in the biggest asset class in the world, US residential mortgages. Anyone who thinks this isn’t going to result in a real toll on the balance sheets of the biggest banks is unduly optimistic. Banking industry experts Josh Rosner and Chris Whalen each expect another bailout in the not-terribly-distant future. So add more to the ultimate cost of the financial crisis.”
Why is Obama lying?
” Regulators are engaging in other forms of regulatory forbearance (finance speak for letting them cook their books), plus asset values are generally artificially high due to near zero policy interest rates. So we have what amount to baked in losses if rates ever get back to something resembling normal levels …”
“But Team Obama is no doubt rationalizing this chicanery: if they can keep from recognizing losses until the recovery takes place, then the ultimate damage will be lower. But Japan’s post bubble record shows that doesn’t work. You simply don’t get a recovery with a diseased financial system. You need to purge the bad assets, only then will meaningful growth resume.”
That’s it in a nutshell. There’s a stinking mess of rotting fish — bad mortgages — at the center of this crisis, and the crisis will not fully run its course until the losses from these mortgages are openly resolved. Today they are still being carried on the books as if they are full-valued assets.
See Smith’s full article here.