Deregulation and the Financial Crisis

With a big "Gee, who could have predicted this?

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Regulatory Failure Number One: Failure to Manage the U.S. Trade Deficit. The housing bubble (as well as the surge in leveraged buyouts of publicly traded companies (”private equity”)) was fueled by cheap credit — low interest rates. One reason for the cheap credit was an influx of capital into the United States from China. China’s capital surplus was the mirror image of the U.S. trade deficit — U.S. corporations were sending lots of dollars to China in exchange for the cheap stuff sold to U.S. consumers.

Regulatory Failure Number Two: Failure to Intervene to Pop the Housing Bubble. Along with an influx of capital, Federal Reserve policy kept interest rates very low. There were good reasons for the Fed Policy, but that did not mean the Fed was helpless to prevent the housing bubble. As economists Dean Baker and Mark Weisbrot of the Center for Economic and Policy Research insisted at the time, Federal Reserve Chair Alan Greenspan simply by identifying the bubble — and adjusting public perception of the future of the housing market — could have prevented or at least contained the bubble. He declined, and even denied the existence of a bubble.

Regulatory Failure Number Three: Financial Deregulation and Unchecked Financial “Innovation.” A key reason that mortgages were made available so widely and with such little review of recipients’ qualifications was a shift in which institutions hold the mortgages. Traditionally, banks made mortgages and held them. In the new era, banks and non-bank mortgage lenders made loans, but then sold the loans to others. Investment banks packaged lots of mortgage loans into “Collateralized Debt Obligations” (CDOs) and then sold them on Wall Street, with a promise of a steady stream of revenue from interest payments. These operations were pretty much unregulated. Despite the supposed sophistication of the investors involved, no one took account of how shoddy the loans were or — more fundamentally — the certainty that huge numbers would go bad if and when the housing bubble popped.

Regulatory Failure Number Four: Private Regulatory Failure. It was the job of ratings agencies (like Standard and Poor’s, and Moody’s) to assess the CDOs and give investors guidance on how risky they were. They failed totally, likely in part because they wanted to maintain good relations with the investment banks issuing the CDOs.

http://www.commondreams.org/archive/2008/01/22/6531/

They just keep stacking the deck in their favor, the blood suckers!

is what Catherine Austin Fitts has been saying since 2004 - that the mortgage debacle isn't from 'people not declaring their income' per se, but drug money being laundered through the system. Massive amounts of cash are a problem, what to do, what to do? The run on Wall Street has been rumored to be drug money, which is why the Dow shot up so much during the Clinton years. That was strangled, so what is the new washer? Mortgages. She warned everyone about this on the radio back in 2004 that there would be a mortgage crises.

I hadn't heard that before, but it makes a lot of sense.