Paul Krugman is a ‘Lehman Bro’
We now live in a very strange world where the intellectual economics king of the Left thinks Wall Street isn’t at fault for the financial crisis.
Paul Krugman has cast his lot with Hillary. That’s fine.
He’s in very serious and high-minded company that includes The New York Times, Vox and Goldman Sachs.
His attacks on Bernie Sanders are dubious and often hypocritical (he didn’t mind Hillary attacking Obama as unqualified in 2008). But Krugman’s reputation isn’t built on his political acumen, but his excellent understanding of, and ability to breakdown economics. That’s why it’s so depressing to see that Krugman either doesn’t understand the financial crisis, or is so desperate to defend Hillary’s coziness with the big banks and frame Bernie as out of touch that he is lying about the danger of Wall Street and the causes of the financial crisis.
In his latest piece, Paul Krugman set out to attack Bernie Sanders for questioning Hillary’s qualifications, but somehow ended up defending Wall Street in the process. He contends that Sanders is “becoming a Bernie Bro,” and he wants to “…illustrate the point about issues by talking about bank reform.”
You see, Bernie doesn’t get how the real world works and Professor Krugman is going to explain it to him.
Here’s the truly offending line:
But were big banks really at the heart of the financial crisis, and would breaking them up protect us from future crises?
Many analysts concluded years ago that the answers to both questions were no. Predatory lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial; the crisis itself was centered not on big banks but on “shadow banks” like Lehman Brothers that weren’t necessarily that big.
Bad Apples
Really, Paul? You are going with the “It was a few bad apples,” argument? This narrative is a favorite of Wall Street. It was also a favorite of the Bush administration when it came to Abu Gharib. The system is fine, the leadership is on track, it was just a few bad actors. They are insignificant — Countrywide! Lehman! Tiny.
Krugman is dangerously close to being in the company of Tea Party-darling Rick Santelli who infamously railed against paying back his neighbors’ mortgages. The analysis of Santelli and those like him (Krugman?) is that it was just irresponsible loans that caused the crash, not Wall Street shenanigans.
Why Paul?
Why this attack? Hillary’s greatest vulnerability with progressives and in the New York Primary is the feeling that she cares more about Wall Street than Main Street. Sanders greatest strength is that he is viewed as the opposite. Shooting down the “We’re going to break up the big banks” argument cuts Bernie down while neutralizing Hillary’s direct financial support from The Street.
It’s hard to find too many examples of true personal attacks from Bernie, so Krugman needs to dive into Sanders’ claim that Hillary’s support by SuperPacs and the financial world make her unfit for office. And that’s how we end up in this sad position where a titan of progressive economics is defending the horrific institutions at the heart of the largest economic crash since the Great Depression.
Krugman on Krugman
My favorite part of Krugman’s solid argument is that the link he cites for, “Many analysts concluded years ago…” is just his own article. That article contains HIS opinion that the crisis was primarily a bank run and Lehman isn’t “all that big.” There are no other, let alone “many analysts” supporting his statement or “concluding” that it is settled fact. It’s some clever circular reasoning and he expects few will click the link and even fewer will know what he referencing in the long article to which he links. Solid.
Little Lehman Bros.
The Huffington Post notes that “many analysts” pinned the majority of blame for the crisis on Lehman Bros. If by “many” you mean Paul Krugman, writing in his 2012 post, It Was Lehman Wot Did It.
But not to fret, Lehman is just some “shadow bank” that wasn’t “necessarily that big,” according to 2016, Hillary-supporting-Krugman. This would be laughable if it wasn’t deplorable and patently false.
Lehman was the fourth largest bank behind Goldman Sachs, Morgan Stanley and Merrill Lynch when it collapsed with $600 billion in assets. It was also the oldest of the four and one of the oldest existing banks in the world having been founded in 1850! I guess as a “shadow bank”?
Again, “many analysts,” writing in the pages of the Times said this about Lehman back on September 14, 2008:
Lehman Brothers, a major investment bank, is apparently about to go under.
The emphasis is mine. The quote is one Paul Krugman’s.
It Was Countrywide Wot Did It?
Krugman relies on another sleight of hand to go with the “Bad Apples” argument and the “Many analysts conclude” statement, claiming that “Predatory lending” was, “…at the heart of the financial crisis.” Predatory lending was at the heart of the crisis in the same way the Luftwaffe was at the heart of The Blitz. Do some German pilots deserve the blame over, oh how about Hermann Göring and Hitler?
The predatory lenders provided the raw materials, but it was the big banks who dreamed up and sustained the CDO beast that turned bad loans into a financial Atomic Bomb.
The global economy did not crash because a few greedy guys in California and Florida suddenly had the idea to sell people mortgages they couldn’t possibly pay. Their scheme wouldn’t have been profitable if the big banks hadn’t created a system to make the machine work. It was the largest banks, benefiting from newly lax capital requirements, that bought the loans and created the markets.
The Heart of the Financial Crisis
The largest single loss in trading history was made not by some supposedly obscure bank or shady mortgage shop, it was Morgan Stanley, the second largest investment bank in 2008.
Howie Hubler ran their bond trading desk and risked everything on subprime mortgages, the kind that were being created by not so small banks like his own and Goldman Sachs. He lost $9 billion. Though I”m sure “many analysts” say Morgan Stanley was not all that big.
Michael Lewis, a journalist who is even better than Krugman at explaining the complexity of the finance system, closes out his blockbuster book The Big Short with this epilogue:
Howie Hubler lost more money than any single trader in the history of Wall Street — and yet he was permitted to keep the tens of millions of dollars he had made. The CEOs of every major Wall Street firm were also on the wrong end of the gamble. All of them, without exception, either ran their public corporations into bankruptcy or were saved from bankruptcy by the United States government. They all got rich, too.
“All of them, without exception.” Goldman, Merrill, Morgan, Lehman, all of them. The thesis of Lewis’ book isn’t that a few bad apples caused the crash, but a few tiny, insignificant funds saw the writing on the wall and made a killing betting against the system the big boys had created. The big banks come off as simultaneously insidious and stupid.
Don’t take my word for it, many analysts in a bath tub agree.
Goldman, The Beating Heart of the Crisis
Goldman, the bank that escaped largely unscathed is probably most responsible for putting their foot on the subprime mortgage gas. There’s a reason the film version of The Big Short shows Michael Bury (Christian Bale) meeting with Goldman, the first bank to create the market for him to short. Goldman Sachs leads the way in creating complex financial instruments and this was true in the lead up to the crash.
The giant bank then reversed course and bought insurance through AIG against the same risky bonds they were packaging and selling. Lucky for them, the government pumped money into AIG so they could make Goldman whole, all while the bank was doing all they could to accelerate the crash. The Financial Crisis Inquiry Commission noted that Goldman in effect crashed the market to their own benefit.
As the crisis unfolded Goldman marked mortgage-related securities at prices that were significantly lower than those of other companies. Goldman knew that those lower marks might hurt those other companies — including some clients — because they could require marking down those assets and similar assets. In addition, Goldman’s marks would get picked up by competitors in dealer surveys. As a result, Goldman’s marks could contribute to other companies recording “mark-to-market” losses: that is, the reported value of their assets could fall and their earnings would decline.
Still not enough, Paul? Well, they even let legendary hedge fund manger John Paulson pick the mortgage securities to go into bonds that Goldman sold to their customers. The Paulson & Co. fund handpicked the worst assets, while Goldman packaged the morgtage securities and sold those CDOs to unsuspecting customers who were led to believe Paulson was investing in the bonds. His fund was actually betting on the bonds failing according to the SEC. This was in April of 2007. Goldman was paid $15 million directly from Paulson for their services (possibly more in fees) and the duped investors lost $1 billion.
Goldman Sachs reported net revenues of $34 billion (PDF) in 2014.
Bernie Bros
It wasn’t a few insignificant banks wot caused the crash. It was the largest investment banks in the world who were at the heart of this crisis. They precipitated it by leaning on the rating agencies to give AAA ratings to junk bonds. They packaged the bad debt and turned it into their own profits…before it all blew up in their faces. Then the government (us) bailed them out. They learned nothing and they are right back at it.
I’m not a columnist for the Times. I’m certainly not an economist. But I know enough to understand that we can’t risk our economy on these massive, and massively unethical institutions. It’s far too dangerous to have 30% of our economy driven by the idea that “Greed is Good.”
But I’m just a Bernie Bro…according to “many analysts.”
