The Financial Crisis

The S&P 500 is down 42% for the year, and 30% in the last month. We're in the midst of a financial meltdown despite the government's efforts to bailout distressed industires.

We've all heard it started with subprime mortgages. But there hasn't been enough discussion on what ever happen to banking standards? Newspapers have touted "the end of capitalism" and "massive federal takeover of banks." You don't need a massive federal beaucracy. We just need some basic standards... a mininum downpayment, a real job with disposable income. The easy money exacerbated the housing bubble. Sure, money was cheaper, but more people could bid higher on a house. If you were playing a poker game, and tripled everyone's chips, betting would increase dramatically.

We need industry standards when the collapse of an entity will have external negative effects on others. When a bank fails and is bailed out by the government, or the FDIC step in, taxpayers are ultimately penalized.

If we built office buildings out of matchstick and tissue paper, and they collapsed would we be wondering why? We have building code, because the collapse of a building has negative external effects. However, it doesn't unduly constrain building in the country.

So who's to blame? Many people, but we only hear about one.

The government: Ultimately the government has a lot of control over the banks. In an effort to buy votes, governments allowed banks and government sponsored banks, like Fannie Mae, to give out money to whomever. It's a lesson that you can't will things to happen politically without economic consequences.

Banks, Wall Street: Once they were allowed to banks got in. There is a herd mentality in banks. If Bank A is making an outsized profit with subprime mortgages, Bank B will feel the need to get in on the action. The current climate on Wall Street focuses in on the current quarter, not the long term health of the company. Executive are usually paid for the short term as well. If a CEO does well with subprime mortgages for several years, he'll get big bonuses. When that risky investment fails, he may get canned, but he'll keep those bonuses. The taxpayers have to come in a prevent economic collapse. They get to privatize profits and socialize the risk. This was most prevalent at Fannie Mae & Freddie Mac.

People: There were a lot of people trying to cash in on the housing bubble. When you see TV shows like "Flip this House", you know you are in trouble. Of course, this is never discussed, as politicans don't want to attack voters. They'd rather blame scapegoats and fat cats on Wall Street.