Originally Posted by joe
What? That's not what I'm saying at all. It's not that it "must" be the governments fault, it IS the governments fault. The behavior we seen from the banking sector was a result of government manipulation of the markets. Did the bankers act crazy? Did they screw over poor people? Yes- and you would have done the exact same thing in their shoes. The government was pushing the banks to act a certain way and they did. If the government starts handing out a million dollars to anyone who wears a Yankee hat, don't be surprised when everyone starts wearing Yankees hats. And if the government starts pushing banks to give out unpayable mortgage loans, don't be surprised when that's what they do. When the federal reserve is pumping money into the banking system and promising to bail them out, don't be surprised when they take risks.
Not only did the government cause the housing bubble, but that was the fricken plan all along. To ease the pain of the tech crash, the federal reserve created a new bubble in housing. Paul Krugman has an article where he talked about that in the early 2000's.
Or are we supposed to believe that every bank in the economy just coincidentally (and simultaneously) decided to hand out mortgage loans to poor people who had no hope of paying them back? Yeah, that makes more sense. Because banks just naturally like to give out $100,000 to people who earn $30,000 a year and live check to check. That's how you become successful in a free, deregulated market, which of course is exactly what we had. Kind of like if you want to become rich in life, lend money to your Uncle who has no job. That's how people manage their finances absent government regulation.
The federal reserve didn't pump the banks full of cash, the government didn't guarantee loan repayment, the government didn't make a concerted effort to keep housing prices above market level. I made that stuff up. And if I didn't, it doesn't matter. The banks are just greedy and they just need to be more regulated, and stuff.
One of the reasons that the bubble got so big and caused such a massive disruption to our financial system is because of the way it was traded as an asset and not due to loan standards (not saying it didn't play a huge role tho).
Investment banks were trading these CDOs made of of mortgage-backed securities (MBS) and were sketchy at best about what was actually in the CDOs and the type of risk they carried. The CDOs were essentially piles of garbage, groups of MBS's that were worthless because of the underlying loans. However, these assets were rates AAA by rating agencies becuase they didn't know wtf they were or how to rate them (and Wall Street went to great pains in order to influence them to rate them AAA).
So the largest investment business on Wall Street was built on shared ignorance. It was a trillion dollar industry that kept growing and feeding itself because of irrational and ignorant behavior on the part of investment banks and traders. If these assets were valued correctly, then the explosion of MBS would have never happened. The system wouldn't have been demanding a massive supply of subprime loans to make into the MBS.
That is why people want to see regulation of the financial industry. Financial engineering and innovation of new securities happen at such a fast rate that banks become leveraged with assets that are poorly understood and evaluated. A lot of this occurs because of the profit-seeking motive and hyper-competition in the financial industry.
The core problem is that the big banks that make up the cornerstones of that industry are publicly traded. The incentives within one of these firms are so skewed because there is no disincentive to taking excessive risks. A CEO will nearly bankrupt a firm and get a $10 million check on his way out of office. And I understand that is one reason why people are pissed about the bailout of the financial system.
There was much more going on than giving out bad loans (which the govt no doubt deserves blame for). The crisis was complex and blame is deserved by banks, rating agencies, and the govt.