BUSINESS: House of Cards – Part II
February 17, 2009 by azdean
Everyone wants to opine on, or simply discover who’s to blame for our current financial crisis. But how about looking at this from the point of view of what really changed here.
Haven’t people always been ignorant or greedy, for example willing to sign for a loan they had no way of ever repaying? Not much change there.
Haven’t there always been unethical companies willing to exploit people, for example by convincing people that they could afford the loan they were signing? Not much change there.
Haven’t there always been pandering politicians who bend rules trying to help their constituents, for example by urging banks to approve sub-prime loans so that more people could own homes? Not much change there.
Hasn’t Wall Street’s greed always pushed them to find clever new ways to make more money, and isn’t that what we call “capitalism”? Definitely not much change there.
And haven’t investors always looked for “safe” investments that pay higher returns than average? Not much change there either.
So what changed that led to this mess?
What changed was that Wall Street discovered a really clever way to pass off incredibly bad investments as the highest rated triple-A investments. Their trick fooled the entire world. Without that trick, all the greed, corruption, pandering and ignorance would not have gone near as far as this bubble did.
Wall Street’s new financial tool, the CDO, was the gas that made this fire roar.
The irony is that the CDO wasn’t created as a way to scam investors. It was created to solve complicated financing problems, to spread out risk, and other legitimate business reasons. But once it was created, it enabled the greed and corruption that is inherently in the system to get way out of hand.
Normally, bubbles can only get so big because only so many investors can be fooled to take on the risk involved. But the CDO’s enabled Wall Street to hide the risk from a world of investors, allowing this bubble to get huge and effecting the lives of people literally in every corner of the globe – whether they be greedy, corrupt, ignorant or simply hopelessly naïve.
What do you think?
I listened to an economist on a podcast say that the biggest problem was our consumer debt level had risen to 100% of our GDP. The only other time that has happened? 1929.
I agree the banks and the government share plenty of the blame. After all, they empowered us to over borrow.
But we didn’t have to take them up on the offer.
Thanks Marcus for dropping by.
When banks are loaning out buckets of cash with literally no questions asked, of course the responsible will not abuse the situation. The problem is that a sizable percentage of the populace either aren’t entirely responsible or simply didn’t realize what they were doing. The whole point of regulations is to prevent this kind of situation. For instance, you would think there might actually be a regulation that requires borrowers to *verify* their income. But apparently not.
But when the regulators (which in the end is Congress) actually encouraged irresponsible behavior, it’s no wonder many took the banks up on the offer of riches (read: homes).
In truth, it took *many* irresponsible people, at all levels, for this mess to get as large as it did. But the primary thing that enabled this irresponsibility to get so far out of hand is that Wall Street found a way (in the form of CDO’s) to push off the consequences of all this irresponsibility and conceal it for so long.
When you see that, then you begin to see why this mess is so big. Irresponsibility is bad enough. Irresponsibility with no consequences is why the world is teetering on the brink right now.