I know everyone out there is trying to affix blame. It's so much more fun than actually taking the problem apart and trying to fix what was wrong. The fact is that many minds, much smarter than mine, many of them "knowing" they were smarter than the rest of us, were busily, if unwittingly, bringing down the financial system, and making lots and lots of money. John Kenneth Galbraith said something like, "when the facts change, I change my mind." The mantra of the past decade was that if the facts don't fit, change the theories and the rules. Cheap money was part of the problem, but so were prognosticators predicting a 36,000 Dow, the ownership society that dissolved into an investment society, people who bought homes as investments not places to live, and shadow-banks who, after running out of good mortgage candidates, went after the not so good. The fact is that by 2005 some 70% of families in the United States owned their own home. That left virtally no one left to get into a house. So they went after those who couldn;t asfford one.But another problem was that 23% of homes were investment properties. People had fallen prey to the perceived wisdom of the experts who predicted $4 million homes in the suburbs. Since brokers and banks needed fees to survive, they were soon converting mortgage owners who could no longer pay the mortgage from a thirty year fixed to a forty year, then an ARM, then option ARMs. Risk was not relevant because they were securitized; everything depended entirely on housing prices always going up. The author saw an ad in the Wall Street Journal for a reverse amortization loan up to $5 million. That's insane, buit no one was willing to say the emperor was naked. Those who dared make the suggestion were soon gone. Because of the way hedge fund and financial managers were compensated, the income was considered a capital gain so it was taxed at 15% instead of 36%. The incentives to sell more mortgages, refinance, resell, buy, buy, rate highly were insurmountable. People at the top were making just hoards of money.
Some blame the CRA but the fact is that the Community Reinvestment Act is 30 years old. It was created to prevent banks from redlining, i.e. not making loans based on location rather than income. Subprime mortgages didn't even exist until about 3 years ago when Greenspan and the Fed loosened up money and made it really cheap (this is a Randian libertarian idea.) Even Greenspan has now said this was a mistake that was a primary factor in the crisis.
Sub-prime loans, in and of themselves, would not have been a problem had financial wizards not invented credit default swaps and collateral debt obligations that virtually, by securitizing and packaging all sorts of debts together, eliminated all risk. These CDO's and CDS's were rated AAA by the rating agencies without any real idea what the risk attached to them was. Technology was supposed to provide the information needed to keep everything transparent. But then again, the same thing was said of the telegraph.
The fact is that sub-prime loans were hugely profitable for lending and mortgage companies (note that only a very few banks were involved in these loans except as they were the owners of the mortgage companies.) They were making money off fees and because the loans were sub-prime they could charge higher interest rates. They were hugely profitable; just look at the balance sheets before it all came apart. Fannie and Freddie went wrong by insuring the loans, but again, they couldn't see the risk and the CDO's and CDS's were rated AAA.
Both political parties share the blame. The Republicans, had they been worried about Freddie, Fannie or any other systemic problem had ample opportunity between 2000 and 2006 to do whatever they wanted since they controlled the White House and both houses of Congress. The fact is that the "ownership society" was a big goal of the Bush administration. That meant encouraging people to buy homes. The Democrats should have done something too. No question. And a lot of the people involved in creating the problem we now expect to fix it: Paulson, Geithner, etc.
Unfortunately, the climate of cable TV pundits, having to fill up 24 hrs of "news" spend all their time trivializing and playing the blame game, a process that only makes things worse and people angry. Doesn't remotely help solve the problem.
Succinct, but pithy. Recommended to everyone. If you read nothing else, I recommend the conclusion. His recommendations make a lot of sense and should be read by everyone in Congress.
Read with [b:Chain of Blame How Wall Street Caused the Mortgage and Credit Crisis|3461662|Chain of Blame How Wall Street Caused the Mortgage and Credit Crisis|Paul Muolo|http://ecx.images-amazon.com/images/I/51okjNI5KGL._SL75_.jpg|3502941], [b:Street Fighters The Shocking Demise of Bear Stearns, the Toughest Firm on Wall Street|6156362|Street Fighters The Shocking Demise of Bear Stearns, the Toughest Firm on Wall Street|Kate Kelly|http://ecx.images-amazon.com/images/I/510VgV6WwiL._SL75_.jpg|6335528] and [b:Fool's Gold How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe How an Ingenious Tribe of Bankers Rewrote ... Made a Fortune and Survived a Catastrophe|6442950|Fool's Gold How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe How an Ingenious Tribe of Bankers Rewrote ... Made a Fortune and Survived a Catastrophe|Gillian Tett|http://ecx.images-amazon.com/images/I/51yZ1nNq5OL._SL75_.jpg|6632920]
