The problem for the banksters was (and is) that the pervasive lethargy of our mature capitalist economy poses huge challenges for industry bosses who are judged solely on their ability to boost quarterly profits. Goldman's Lloyd Blankfein and JPMorgan's Jamie Dimon could care less about economic theory and the vitality of the real economy; what they're interested in is making money by the most lucrative means available. All they care about is how to deploy their capital in a way that maximizes return on investment. "Profits," that's it. Nothing else matters, least of all the real economy, which they no longer need to bother with.
The origins of Wall Street's new alternative financial universe
Maximizing profits is much more difficult in a world that's saturated with overcapacity and flagging demand, as ours is. In general, the world now tends not to need more widgets or widget-makers. Therefore, the only way to ensure profitability was to invent an alternate money-making system altogether, a new universe of financial exotica (CDOs, MBSs, CDSs) that operates independent of the sluggish real economy -- in short, a very profitable gambling casino in which the "smartest guys in the room" can systematically and repeatedly bilk the rubes. "Financialization" was just the ticket. It allows the main players to pump-up the leverage, minimize capital outlay, inflate asset prices, and skim off record profits even as the real economy struggles with, and endures, severe stagnation.
Financialization provides banksters an excellent and unprecedented path to wealth creation, which is why this sector's portion of total corporate profits is now nearly 40 percent. It's a way to bypass the now pervasive inertia of the production-oriented "real' economy. The Fed's role in this new paradigm is to create a hospitable environment (low interest rates) for bubble-making so that the upward transfer of wealth can continue without interruption. Bubblemaking thus became the new "standard operating procedure."
Scores of people knew what was going on during the subprime mortgage fraud fiasco
Robert Rubin, Alan Greenspan, Timothy Geithner, and others have been defending their reputations by disingenuously asking, "Who could have known about this mortgage fraud and where it would lead?" But many people knew. In September 2004, the FBI began publicly warning that there was an "epidemic" of mortgage fraud, and it predicted that this epidemic would produce an economic crisis if it were not soon dealt with." Click here
The FDIC also knew. In testimony before the Financial Crisis Inquiry Commission, FDIC chairman Sheila Bair confirmed that she not only warned the Fed of what was going on in 2001, but cited particular regulations (HOEPA) under which the Fed could stop the "unfair, abusive and deceptive practices" by the banks. Also, the Fitch rating agency knew, and even Alan Greenspan's good friend and former Fed governor Ed Gramlich knew. (Gramlich personally warned Greenspan of the surge in predatory lending that was apparent as early as 2000. Here's a bit of what Gramlich said about this in the Wall Street Journal:
"I would have liked the Fed to be a leader" in cracking down on predatory lending, Mr. Gramlich, now a scholar at the Urban Institute, said in an interview this past week. Knowing it would be controversial with Mr. Greenspan, whose deregulatory philosophy is well known, Mr. Gramlich broached it to him personally rather than take it to the full board at the Fed. "He was opposed to it, so I didn't really pursue it," says Mr. Gramlich. (Source: Wall Street Journal Click here)
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