To many Americans one of the most bewildering things about the ‘Great Recession’ is an inability to know precisely when it began. In general, Americans are a people that like to associate dates, individuals, as well as documents with great events, and few of the key indicators have been available, that is, until now.
The ‘Great Recession’ began on the 3rd of July 2007. On that date, the most important document associated with the demise of the American economy - SEC Release No. 34-55970 - went into effect. The reason why, the Securities and Exchange Commission chose the day before a holiday, the 4th of July, which fell on a Wednesday, in the middle of a week when many Americans would be on vacation and financial institutions closed, was not coincidental.
For several months prior to that date, the SEC, the Federal Reserve, major banks and investment houses had come to realise that, in spite of a prohibition against short trades the financial system was awash with such positions to an extent that no one knew, not even in broad and general terms what the impact would be if a substantial portion of the short positions were to find their way onto the exchange.
In addition, the major financial players knew that not since 1929, had the amount of private debt been equal to the gross national product of the United States. The combination of debt, interest rate derivatives, short trading and to a lesser extent credit default swaps had sent the financial system spinning out of control.
Those in the know sought to accomplish two things that week, first, to try and sort out the extent of the short positions and over extended derivative market. And second, to safeguard their own financial positions, their own fortunes.
Someone had to tell the president. And, the story that they laid out before the president was chilling.
Mr President, the conversation would have gone, we have to reduce our obligations. To do this we will have to drastically reduce the value of all stocks and bonds. But to do that Mr President we will have to do something that has not been done since 1929, that is, we will have to make short selling legal. Otherwise, it will become obvious that we did not enforce the rules that were ours to enforce, and that revelation could expose us to charges of criminal negligence.
Even if we bring the stock exchange down from 13000 to a level of about 6500 we will still be trillions of dollars below the required asset support minimums. We want you to understand, Mr President, that we will have to reduce our obligations to retirement savings as well as pension funds by devaluing them some 30 or 40%. But, although the amounts are substantial that is still not enough money to offset the extent to which our obligations exceed our assets.
How far reaching is this crisis?, Mr President, some 1,000 banks and investment houses are affected or infected, if you will, including all the major players.
In essence, Mr President, we may be able to forestall another Great Depression, but a long and enduring recession is now inevitable, and with the recession will come unemployment in the millions, along with millions and millions of home and commercial real estate foreclosures …
In the past Mr President, as in the LTCM crisis, shareholders will be wiped out, but none of the creditors will take any losses. That is if you, Mr President, can convince the Congress that transferring private debt to public debt is in the best interest of the country.
If there is a silver-lining, Mr President, it lies in the fact that we get to decide who wins and who folds, and that is substantially it.
And, the SEC, the Federal Reserve, the major banks and investment houses went to work trying desperately to unravel the economic chaos that they had themselves spearheaded, while the American people enjoyed their extended 4th of July holiday unaware of the impending demise of economic innocence.
The massive exposure of short positions and the liquidity crisis which accompanied it is blamed for the Wall Street Crash of 1929.
President Hoover condemned short sellers. FBI Director J Edgar Hoover threatened to investigate short sellers not only for triggering the Depression, but for their role in prolonging it to keep control of the banking infrastructure.
Financial regulations governing short selling were implemented in the United States in 1929 and were in effect until the 3rd of July 2007 when they were removed by SEC Release No. 34-55970.
A young idealistic J Edgar Hoover sought to investigate and prepare prosecutions of those whose reckless trading practices brought about the crash of 1929 and for continuing the risky behaviour after the crash.
The financiers of the enemies of the United States who perpetrated 9/11, made money short selling American airlines' stock on the London Stock Exchange. It was Americans, however, who short sold the US economy into disaster.
Making short selling legal on the 3rd of July 2007 does not negate the fact that it was illegal from 1929 until that date.
Where is our current Director of the FBI, and do we have a functioning Department of Justice?