Two days ago, the president of the Federal Reserve Bank of San Francisco provided a good summary of at least part of the reason we got into this financial mess :
Borrowers, lenders, and regulators are lulled into complacency as asset prices rise... a sense of safety on the part of investors is characteristic of financial booms...
When optimism is high and ample funds are available for investment, investors tend to migrate from the safe hedge end of the ... spectrum to the risky speculative and Ponzi end. Indeed, in the current episode, investors tried to raise returns by increasing leverage and sacrificing liquidity through short-term—sometimes overnight—debt financing. Simultaneously, new and fancy methods of financial engineering allowed widespread and complex securitization of many types of assets, most famously in subprime lending. In addition, exotic derivatives, such as credit default swaps, were thought to dilute risk by spreading it widely. These new financial products provided the basis for an illusion of low risk, a misconception that was amplified by the inaccurate analyses of the rating agencies. This created a new wrinkle ... Some of the investors who put money into highly risky assets were blithely unaware of how far out on a limb they had gone. Many of those who thought they were in the hedge category were shocked to discover that, in fact, they were speculative or Ponzi units.
At the same time, securitization added distance between borrowers and lenders. As a result, underwriting standards were significantly relaxed. Much of this financing was done in the “shadow banking system,” consisting of entities that acted a lot like banks—albeit very highly leveraged and illiquid banks—but were outside the bank regulatory net. Although these developments reached an extreme state in the U.S. subprime mortgage market, risky practices were employed broadly in the U.S. financial system. And this activity extended far beyond our borders as players throughout the global financial system eagerly participated...
This cult of risky behavior was not limited to financial institutions. U.S. households enthusiastically leveraged themselves to the hilt...
As the Austrian school of economists has argued for well over a hundred years, the bigger the bubble, the bigger the crash which follows. While this view has not been taken seriously by mainstream economists, that is starting to change, with the Wall Street Journal, Forbes and other mainstream financial publications starting to agree with the Austrians on this point.
Comments
How we got in to this mess is outsourcing to China and India. These corporations outsourced tremendous amounts of jobs over the past three decades resulting in massive profits which they took and invested in Wall Street in More Massive Ponzi schemes. Meanwhile Americans tried to shift to new types of employment of shuffling the paperwork involved in importing massive amounts of worthless, toxic, junk from overseas. Americans, lonely, disconnected, cut off from and out of touch with their races, genetics, value systems...... snapped up all this shoddy merchandise hoping to fill the ever enlarging hole in their souls but they became increasingly insatiable and further and further indebt. Which was great because it kept the power brokers in charge and with their thumb squarely planted on the American's forehead. Hey, who's going to complain or revolt and be the first to get called on the carpet by "The System", lose their job and everything else they thought they were working for by making waves? Eventully the bubble burst and it turned out it was all fiat and no one in the USA had jobs anymore to buy the shoddy inferior products. The blame is laid at the feet of the overpriced housing market but that was just a symptom, not the disease and it was the first to topple and reveal the massive corruption, debt and incredible deficits and trade imbalances necessary to keep the system afloat. Now some made off with historic profits while the masses were handed the bill with the words "OVERDUE - BALANCE DUE IMMEDIATELY!" stamped on it.
The SF Fed's analysis is pure (Hyman) Minsky, a post keynesian. Minsky's analysis of the market system is based upon his interpretation of Keynes' General Theory, what Minsky calls the "financial instability hypothesis."
Pop goes the "weasel". Some bubble. All by design. Can't put the toothpaste back in the tube. Time to indict...that would be bankers and congress
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