A simplistic narrative has coalesced around the causes of the financial crisis that not only does a disservice to the victims, but represents a thought process that all but guarantees no substantive solutions will be put in place. Five years after the fact it's time to reassess what we think we know about the events that nearly crashed the global financial system.
In the attached clip Jay Richards, author of the book Infiltrated: How to Stop the Insiders and Activists Who are Exploiting the Financial Crisis to Control our Lives and Fortunes, offers his thoughts on three obvious scapegoats that bear less responsibility than you think.
MYTH #1: Greedy bankers preyed on the weak
Conventional Wisdom: The wicked 1% preyed on doe-eyed Mom and Pops
“That’s easy for the mind to grasp; something bad happens in the country so it must have been some greedy guys on Wall Street,” Richards says. “That’s like blaming a plane crash on gravity.”
Greed isn't unique to bankers. A culture of house-flipping, "liar loans," and easy money ran deep through the post-2000 culture, something more widespread than that which fueled the dot.com bubble. For every victim of the mortgage machine, and there were plenty, there were individuals blinded by fast money and willing to play musical chairs using someone else's money.
The government bailed out the banks in large part because not doing so would have exacerbated the woes of Main Street, and ramped up foreclosures even more. The word liar in "liar loans" refers not to the shady mortgage company but the loan applicant.
MYTH #2: Glass-Steagall would have prevented the meltdown
Glass-Steagall is a depression era provision that limited the affiliation between commercial banks and securities firms. The idea is that a bank that accepts loans can’t in turn use those loans to “gamble with clients’ money.”
Fair enough. Two problems. First, it’s naïve in the extreme to think securities firms wouldn’t have levered mortgage securities to the extreme to fund the bubble. That’s what securities firms do. There are perfectly valid reason to reinstate Glass-Steagall (see: JPMorgan (JPM)), but having it in place wouldn’t have stopped the meltdown. In fact Richards argues the opposite is true.
The absence of Glass-Steagall allowed the shotgun weddings that at least limited that depths of the collapse. There are those who argue convincingly that mortgage security transactions created moral hazard, but if you’re in the camp that the government should have done more it’s paradoxical to long for Glass-Steagall.
“The irony is if that provision had been in place the crisis would have been much worse,” notes Richards.
MYTH #3: The transactions were too complicated for people to understand
This is the most popular and insulting of the bedrock beliefs regarding the crisis. Richards points to the movie “Margin Call” as the cinematic version of this idea. The basic idea is that a bunch of Phd’s at the bottom of firm hierarchies developed products too complicated for even banking senior executives to decipher. As a result, when the crisis hit no one could possibly detangle the mess.
Curiously the same Wall Street “fat cats” I let off the hook above are largely responsible for this myth. At the root of the crisis was a simple, deeply flawed idea: “There is no correlation between various housing markets. Therefore a collapse in Nevada subprime housing, and the same event in Minneapolis, would be unrelated.”
From that obviously stupid idea stemmed scores of sliced and diced mortgage-based financial products peddled all over the world. Naturally the whole daisy chain melted at once. That’s it. Everything else is just a bunch of higher math applied to a simple idea.
“The securities market is far less complicated than something like the supply chain for the iPhone,” maintains Richards, a philosophy student by training. The issue was one of government regulations skewing the profit incentive along the product chain. Subprime risk was understated largely because it was perceived to be backstopped by the U.S. government. When politicians peddle the idea of home ownership as the American Dream and create laws incenting institutions to give loans to those who can’t afford them, the underlying risk is understated.
Is it therefore the politicians’ fault? It’s lovely to think so, but the hard fact is that we elected these people in the first place.
There's absolutely no question that bank profiteers who should have been jailed or worse emerged from the financial crisis unscathed. This isn't an apology for them, but a call to arms in the name of of personal accountability.
Your bottom line is this: We created the housing mess as a society - you, me, Wall Street, and the pandering financial dilettantes we voted into office. Unless we accept those hard facts as a society, we are doomed to be forever on the brink of yet another financial crisis.
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