a house of cards

kudos to robert stewart (formerly of royal dutch shell), who recently published a brief, clear explanation of how we got into the current financial crisis. tracing the collapse back to the widespreach practice of subprime lending, he writes:

in summary, the essence of the subprime crisis is that money was lent (often through the agency of questionable mortgage brokers) at very low interest rates (courtesy of the fed) to hundreds of thousands of people (all they needed was a credit score and a pulse) who could not afford to pay it back; and it was backed by collateral (a house) that was not properly valued. such assets, accurately described as “liar loans,” were then packaged into opaque securities, known as structured-investment vehicles (sponsored but not guaranteed by a respected and well-known name), which very few people understood. they were sold on to pension funds, banks, and others whose gullible investment managers also did not understand them and failed to carry out the rigorous analysis that their clients had a right to expect.

government encouraged all of this by supporting affordable housing (which was politically correct) and accusing banks of redlining (failing to lend to poor and black people in the same proportion as they lent to the rich and white). when the borrower, already maxed out on his credit cards, predictably failed to make payments, the scale of the problems eventually became apparent to somnolent regulators and financial institutions. confidence and trust evaporated, because no one knew which institutions held suspect securities, how much the losses were, and who was ultimately safe. a financial system built on debt and excessive leverage was a financial system built on sand.

stewart's analysis doe not detail the moral rot underpinning the current predicament, but he does point out:

populist politicians rarely blamed the borrowers, because there are so many of them and they vote; instead they blamed greedy capitalists, speculators, short sellers, anyone except the debtors, and the imprudent economic policies of the u.s. government.

the entire article, which chronicles how this root issue led to the broader financial calamity, is worth reading and can be found here.