As can be seen from John Stossel's article below about the Lesson of Thanksgiving, the difference between capitalism and socialism lies in the built-in economic incentives. Everything starts with the nature and propensity of the individual, which can be studied and used as a starting point. And in such studies it is not a secret that people have always acted in what they perceive to be their own self-interest and will continue to do so.
In light of that, I wanted to do a quick and simple analysis of the housing and MBS markets along the same lines: what were the economic incentives within these markets during 2001-2008, and have those incentives changed?
We all know now that during the period leading up to the crisis, lots of "toxic" mortgage loans were issued, whereby loan brokers and originators pretended that everyone earned enough to buy a house, that they should buy a house for the maximum possible monthly payment, while individual borrowers allowed themselves to be convinced of the same lie. After all, why not do it if you're told you can always refinance and get more cash out every few months or so?
Why would financial professionals all of a sudden make loans they knew would be likely (and often, definitely) to fail? Did they all of a sudden stop acting in their own self-interest? Of course not. We all know by now that they were making toxic loans like crazy because they got to keep all the profit and none of the liability. If I can by a car that is a "lemon" and immediately resell it at a profit, why wouldn't I? I don't care if the car is a lemon, especially if there is enough ignorance going around allowing me as the seller to take the position that maybe the car isn't really a lemon, no one really knows that 100 percent, so let the buyer figure that out for themselves...
So how did the system allowing one to buy junk, resell it, and make a profit without any liability come into play? For one, the financial industry developed financial instruments backed by income streams from mortgage payments, that could be sold to consumer-investors, making the ultimate purchaser of the mortgage income stream far removed from the mortgage borrower. But I submit that even this new "securitiztion system" would not have led to the crisis that we now face without another and much more important component: complete elimination of the risk for certain players in the mortgage loan market. Yes, read that again. Not some diversification or spreading of the risk, but complete and artificial elimination of the risk.
Who were the originators selling the loans to? -- The investment banks. Who were the investment banks selling the pools of loans to? – The federal government. Where does the federal government get the money to buy stuff? The tax payer. Us! And the loans that were not sold directly to the federal government were also sold to the taxpayer. They were sold to consumer-investors -- pension account holders, 401k account holders, etc.
Banksters were making enormous profits from toxic and fraudulent loans by dumping all the losses on the taxpayer through Fannie and Freddie (and the rest on the same taxpayer through pension funds). And as if that wasn't enough, when they ran out of investor money to make more toxic loans and keep the pyramid going, they got a bail-out from the same federal government to keep doing what they are doing (or invent a new Ponzi scheme) and keep paying themselves enormous bonuses.
So my answer to who caused the 2008 financial crisis is simple: the federal government. By using "market inventions" such as mortgage purchase programs, FDIC insurance, and other tools amounting to complete insurance and guarantee against banksters' losses, the fed completely undermined one of the most important checks on the free market: the risk of failure. Once you take away the risk of failure, anything goes. No wonder banksters take our money, gamble with it, and then dump the losses on us as taxpayers while we remain passive and comatose.
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