The Financial Crisis in Five Minutes

Blaming the financial crisis on greedy bankers overlooks the fact that bankers have always been greedy. 

Blaming the crisis on George Bush style deregulation ignores the fact that Bush actually increased regulation. I have yet to hear a rational argument that GWB decreased regulations in the mortgage space.  What bill was it and when did it pass?   

Blaming the crisis on the free market ignores the fact that the United States - with their government protected behemoths Fannie, Freddie and Ginnie - was considerably less free market oriented in mortgage finance than most European countries.  I speak from past experience working mortgage finance in Germany, Spain, UK and the Netherlands.

Then what caused it? 
    Jacob Spinney put out a video below that goes into some of the reasons why arguments that blame this crisis on any of these easy scapegoats is wrong.  In fact, he points out that at the root of this crisis is monetary mismanagement and regulatory overbearance.   He goes over Fractional Reserve Banking, Deposit Guarantees, the GSEs, low Fed interest rates and CRA.
    Interest rates 

    Most interesting to me is the discussion on the Federal Reserve.  When the Fed artificially lowers interest rates below what the market would set it, it incentivizes consumers to stop saving and start consuming.  The low interest rate sends the illusion that there is more savings in the economy that there actually is.  This gives the false signal to investors that there will be far more consumption in the future than there actually will be. They take out low interest rate loans and uses those loans to increase to meet that expected future consumption which of course eventually loses steam. 

    Quantitative Easing cannot create any long term increase in capacity (think housing).  Inevitably, the bust comes. Then there is hell to pay because there was a ton of malinvestment based upon this false premise of increased capacity.  


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