Money, Power And Wall Street On Frontline

Watch the three hours and 47 minutes of four total shows here.

I love PBS Frontline. I think it tends to be fair and to be journalistically solid. The show does have a definite pro-regulation bias. Whether it is tackling cell phone towers or the porn industry, the point of its shows is that people are getting hurt and even dying when left to their own devices and that more government regulation would save lives and be a good thing.

I think that if people want to climb cell phone towers for the money offered them and they want to climb in an unsafe way, I’m not sure that requiring companies to prevent people from doing what they want is a good idea. I’m not necessarily opposed to it either. I’m just not kneejerk uniformly in favor of regulation to prevent people choosing to do things that are bad for them.

The PBS show on Wall Street prominently interviews Joseph Stiglitz as in favor of more government intervention. It does not mention the well-paid public advocacy he did for Fannie Mae and Freddie Mac, the propaganda work he engaged in for these companies dissing their critics who said the companies were a house of cards waiting to fall down. The critics were right, Joseph Stiglitz was very wrong. But Stiglitz pays no price.

Fannie and Freddie have needed a $150 billion bailout so far and more taxpayer money will be needed. At least the banks and AIG and company paid back their bailout and the government even made a profit on it.

As for the Barack Obama government investment in the UAW and GM, that is unlikely to ever be paid back.

The Frontline special says that Wall Street got a bailout but Main Street didn’t. Well, much of the Wall Street bail out was unneeded. Goldman Sachs and some of the major banks needed no bailout but were forced to take one to save face for weaker financial institutions. And all these so-called bailouts were paid back with interest. The U.S. Treasury made a profit on them. They weren’t bailouts as much as stopgap loans.

All the people interviewed for the series either have no discernible ideology or they are left-wing. None of them put any blame on government policies that forced banks to lend to people who were a bad credit risk. Banks can’t invest their funds as they see fit. They have to get regulatory approval for their investments and if they want to expand, they have to buy off left-wing interest groups like ACORN by donating to them hundreds of millions of dollars. If banks could’ve invested their funds as they saw fit and without the distorting effect of Fannie and Freddie looking to buy subprime mortgages, this mortgage crash and economic crisis would not have happened, as it did not happen in Canada, which has banks less susceptible to left-wing interest group lobbying.

Frontline gives a lot of time to the Occupy Wall Street movement but portrays it as mainly wanting to hold banks accountable to sound lending practices when in reality Occupy Wall Street wants to get rid of all debt (such as mortgages and student loans). This would end the Western world’s economy as we know it. This side of the Occupy crowd gets no play on these Frontline documentaries.

Frontline: “The recession destroyed $11 trillion of American’s net worth. Occupy Wall Street wanted bankers held responsible.”

This recession was not primarily caused by bankers, which Frontline alleges. It was caused by government policy that mandated lending to people who were bad credit risks.

Frontline calls for criminal prosecutions of bankers but none for the politicians who created the policies that caused the recession.

Frontline correspondent Martin Smith: “What upsets people is that banks have recovered but the economy hasn’t.”

This is typical left-wing thinking. If somebody is getting rich but these riches aren’t spread evenly, that’s a bad thing.

Whenever there’s vibrant economic growth, the rewards are not spread evenly. If you want even distribution of resources, you can’t have vibrant economic growth. It’s a classic freedom vs. equality dilemma. For conservatives, freedom is more important. For liberals, equality is more important.

And the banks aren’t booming. Bank of America, Wells Fargo and Citi are struggling. They’re teetering on the edge of bankruptcy.

Banking has become a less profitable business thanks to the excessive regulations passed by the Democrats in 2010. Lenders are less likely to lend out money for mortgages and other things because the prospect of timely repayment is diminished by increased government regulation of the free market.

Frontline shows journalists heckling bankers. “Lloyd Blankfein, will you give the American people an accounting of how you spent their money?”

Blankfein runs Goldman Sachs, which didn’t want or need a government bailout, so why should they give an accounting about funds they were forced to take and paid back as soon as they were allowed?

Reporter to banker: “Do you have any regrets about how you spent taxpayer’s money?”

Well, all taxpayer money was repaid as soon as the banks were allowed to repay the funds they were forced to take.

Frontline: “Many questions have been asked but there have been few satisfying answers [from bankers].”

Well, of course bankers can’t give you satisfying answers because if they were free to speak, they would point out government policies that forced them to lend out money they had little prospect of being repaid, and this caused the recession, but if bankers said this publicly, they would simply bring down the wrath of leftists and that would make it harder for them to do business.

Frontline: “Finance might have gotten too complicated for anyone to understand.”

Well, reality will sort it out quick. The market will sort it out. You can’t fool people for long when there is money to be made in accurately gauging what is going on.

Frontline: “Managers of these institutions have been given an impossible task that they won’t be able to comprehend.”

When there is money to be made from comprehending difficult data, people will figure it out right quick. Many people, for instance, made big money in 2007 betting on the collapse of real estate prices.

Frontline shows a Democrat lawmaker yelling at bankers, “You created the mess we’re in. You created CDOs. You created credit default swaps.”

There’s nothing wrong with these financial instruments. The economy was fine until people stopped making their mortgage payments (this increasingly happened from 2006 onward). Who rigged the game so that many people who could not afford mortgages and were bad prospects for paying back mortgages got such loans? Politicians primarily, not bankers. Bankers want to make money. You don’t make money lending money to people who can’t pay it back. Who said bankers have to lend money to minorities with bad credit? Politicians.

Frontline: “It’s hard to pinpoint the origins of America’s financial crisis but one weekend at this resort in Boca Raton, Florida, is a good place to start… At the time, it seemed innocent enough.”

That weekend bankers developed new financial instruments to try to manage risk.

And Frontline blames the bankers for the crash. It never investigates politicians who determine the rules that bankers operate by, except to argue that politicians did not regulate bankers enough. There’s nothing on Frontline about politicians forcing banks to loan out money to those unlikely to pay it back.

What was Wall Street’s primary role in the real estate crash? They played the role of suckers buying mortgage-backed securities they did not understand. Mortgages were a solid business until politicians blew it up by forcing banks to lend out money that was not wise to lend out.

If financial instruments don’t work as expected, those using them will suffer. The stupid will be culled out of the game.

Many of the fancy financial instruments developed over the past 20 years were derivatives. They were a way to manage risk. But if government creates a house of cards that is going to crash down as it did in 2007-2008, most of these fancy ways of managing risk are going to get overwhelmed. But not all bankers were overwhelmed. Goldman Sachs was smart and made money from this disaster as did many other smart people. The dummies were bankrupted.

Most of Barack Obama’s mortgage relief programs were aimed at bailing out people who bought more home than they can afford. Why should people who made prudent financial decisions bail out those who made bad decisions? Why reward people for making stupid decisions? That’s what Obama, the Democrats and many Republicans want to do with their mortgage relief programs. They are programs to relieve those who acted idiotically from the painful consequences of their stupidity. Such relief reduces moral hazard, aka incentives to act prudently.

Bankers who under-estimated the amount of risk they were taking on with their credit-default purchases lost a lot of money just as people who under-estimate the risk they’re taking on with any financial purchase get hurt. That’s called the reality principle and works pretty well until you dull it out government doles.

There’s nothing inherently bad about credit default swaps or fire or water or guns or nuclear weapons. It’s all about how these things are used. If you make a bad choice and only hurt yourself, that’s one thing, but when you make decisions and hurt innocent people, then you’re doing something terrible.

Because of credit default swaps, credit became more widely available. The trouble became serious when U.S. government policy demanded that banks extend this credit to people, frequently politically favored minorities such as blacks, who were unlikely to pay back such loans.

If it had not been for government forcing them to do such risky things, bankers would never have extended many of these risky loans, and therefore, they would not have had such gigantic losses when the real estate market began crashing in 2007.

About Luke Ford

I've written five books (see My work has been covered in the New York Times, the Los Angeles Times, and on 60 Minutes. I teach Alexander Technique in Beverly Hills (
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