GOP members demand words "Wall Street" not be in financial crisis report.

[Kasz216]

ChichiriMuyo said:

Kasz216 said:

The committee doesn't see that as what caused it would be my guess.

Which, it really wasn't.  What caused the crisis was that housing was down all over the country at once.

Which generally was seen as an impossibility and only happened because of widespread government intervention in the housing market.

The housing market caused the derivitives to crash.

There was nothing wrong with the risk prevention methods set up in the derivities, outside of not considering the fact the government was going to fuck it all up.

It's like if you stored a bunch of propane in your backyard with more then enough protection and saftey measures... and it all exploded because your neighbor decided to break in smoking a cigarette.

How is that your fault?

The problem with your argument is that there is a reason for why the housing prices dropped.  It wasn't some sort of black magic (okay, maybe it was, I don't know what Goldman Sachs has actually been up to behind the scenes), it was a flaw in the banking system.  Banks were going so far as to give loans to people with bad or no credit, sometimes without a credit check, just to move property that they could... get this... sell derivitives of.  These companies would have gone under quickly with their bad business practices, but they were making bank off of their "insurance."  Yes, the simple story is that the collapse of the housing market took down the derivitives market.  But in economics there is no simple story.  Without the mortgage derivitives markets no one could have afforded to take the risks that they did.  The companies that sold bad mortgages intended to keep themselves in business by selling those off to whatever sucker would pay, then eventually they reached a point where there were no buyers so they bought up their own junk or the junk of similar institiutions.  Without the derivitives market there is no housing crash.  There is no drive to sell whatever to whoever, and there is no financial crisis.

Derivitives are perfectly fine financial instruments when used properly.  Leading up to the crisis they were not.  They were used to degrade the standards by which loans were made in order to make more derivtives.  Without the derivitives the loaning standards couldn't be degraded, which means that derivitives cannot be excluded from the equation.  If they can't, Wall Street can't, because Wall Street was where the demand for them came from.  If no one wanted derivitives, they wouldn't be sold, if they weren't sold loan standards couldn't degrade.  The people on Wall Street make their living by researching and understanding the markets they are investing in.  If big investment companies buy into derivitives then they have someone to research their source, they would see that houses are sold to unworthy buyers, they would see that the derivitives were risky, and they'd see that throwing money in that direction came at a high risk.

What would Wall Street do to combat such risks?  Well, they call them credit default swaps.  Another form of derivitive.  Knowing that their competitors were selling junk, they bought it up greedily with the intention of trading back the junk for much more money.  They cut up the original instruments, sold random pieces in large groups, and hope theirs wouldn't fail before anyone else's.  The people who bought them did so hoping that they would.  And they knew that loan standards were rapidly falling apart, meaning that bad loans were guarenteed to occur and that the bets on bad derivitives would pay off for those willing to buy them.

The whole system was cyclical.  Not one part of it could have destroyed the economy without the help of the others.  Whitewashing the impact of one factor or another emits the whole story.  It undermines the systemic nature of the crisis that the American tax payer was asked to bail out on the grounds of systemic risk.  The system was the relationship between all of these factors, and a few others, and they all worked together to make things fall apart.  If the people in control of one backed out, the others would have stopped far short of the damage they dealt.  No one pulled out.  They played chicken, knowing full well that if no one pulled out everyone would be wrecked.  Everyone got wrecked.

Except... that's not why banks were giving those loans out.  See all the government legislation and prodding to increase Homeownership because homeownership is "The American Dream".

It had nothing to do with "greed."   The financial meltdown was much like a Nuclear Meltdown... it took extrodinary circumstances to happen.  It took a nationwide housing bubble crash... which up until it happened is like saying there was going to be lightning strikes in every city in the US at the exact same time.  Even with the housing bubble you weren't expecting them to all simaltaniously crash at once.