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New information about economic collapse of 2008–Goldman Sachs biggest bankruptcy large cause of current deficit

2011-07-07

America’s central bank, the Federal Reserve, was forced by the Supreme Court to release information on loans that it made from its “discount window” recently.

The timing of these loans is interesting.  Lehman Brothers owed 2 billion dollars to the Reserve when its parent unit, Goldman Sachs, filed bankruptcy that day.  It repaid the $2 billion on October 8.  Then it borrowed $15 billion on December 9.

Previously, Lehman had owed the Reserve $18 billion on June 25, 2008.  That was its peak borrowing for that year.  However, other companies, one from Great Britain and one from Switzerland, had greater borrowings.$31.5 billion and $20.5 billion., both in the fall of 2008.

It appears that the financial business of Lehman Brothers, a subunit of the investment bank Goldman Sachs, required large short term loans which were repaid within 28 days in order to assist it in difficulties associated with the financial crisis.  This program, which lasted from March 7 through December 30, 2008, made up to $80 billion available to  such firms.

The financial crisis which occurred publicly in 2008 and was precipitated by events starting in 2007 has not been fully explained in the public eye.  That it was due to a lack of adequate regulation and supervision by the federal government has not been a popular explanation.  In fact, there were other incidents which had a major impact.  The collapse of the housing  bubble in late 2007 was critical.  House prices lost 30-40% and are still dropping.

That the crisis occurred during President Bush’s term of office and that the initial response to the crisis–the determination to offer a trillion dollars or more to the financial industry from federal coffers–came from President Bush’s men in the Treasury Department has not been popularly remembered.   Overall, the Federal Reserve put out $3.5 trillion dollars to fight the collapse in the financial markets during the crisis years of 2007-2009.

President Obama did not start work until January 21, 2009.  Most people in the United States today have the misconception that the federal response to the financial crisis occurred entirely on President Obama’s watch and that the resulting deficit is his fault.  These mistaken ideas are the result of watching TV, looking on the Internet, and otherwise ingesting the pathetically poor propaganda dished out by the main mass market media outlets.  Any resemblance to actual current events is coincidental.

The unsustainable deficit that the country faces is entirely the fault of a two term Republican president, and the crisis occurred late on his watch.  So it is quite rude of these partisans to demand a Procrustean solution to the deficit problem while practicing brinksman political maneuvering.  The deficit problem must be solved with a view to both short term and long term consequences. Recovery from the crisis cannot be impaired, instead it must be encouraged in order to enhance revenue.

President Obama has proposed a comprehensive plan which will include $2 trillion in revenue enhancement and solve more long term problems.  This is a step in the right direction and an improvement over the negotiated version.

The most effective solution would be to increase revenues by canceling loopholes, and then start cutting the budget after public program reviews. Priorities must be in favor of changes that will reduce the real cost of government, not just reduce current costs at the expense of greater costs in the future.  We need to be vaccinated and take our vitamins, in an economic sense.  Worst of all, we need that colonoscopy if the economy is to improve soon.

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