Must-Read: Barry Ritholtz: What Caused the Financial Crisis? The Big Lie Goes Viral

Barry Ritholtz (2011): What Caused the Financial Crisis? The Big Lie Goes Viral: “Rather than admit the error of their ways…

…people are engaged in an active campaign to rewrite history…. They prevent measures from being put into place to prevent another crisis. Here is the surprising takeaway: They are winning. Thanks to the endless repetition of the Big Lie…. so colossal that no one would believe that someone could have the impudence to distort the truth so infamously. There are many examples: Claims that Earth is not warming, or that evolution is not the best thesis we have for how humans developed… that the infrastructure of the United States is just fine, Grade A (not D, as the we discussed last month), and needs little repair. Wall Street has its own version… that banks and investment houses are merely victims of the crash… [which] was caused by misguided government policies… not irresponsible lending or derivative or excess leverage or misguided compensation packages…. The Big Lie made a surprise appearance Tuesday when New York Mayor Michael Bloomberg, responding to a question about Occupy Wall Street, stunned observers by exonerating Wall Street: ‘It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.’…

What about… facts?… No single issue was the cause. Our economy is a complex and intricate system…. Fed Chair Alan Greenspan dropped rates to 1 percent — levels not seen for half a century — and kept them there for an unprecedentedly long period…. Low rates meant asset managers could no longer get decent yields from municipal bonds or Treasurys… turned to high-yield mortgage-backed securities… failed to do adequate due diligence… relied on the credit ratings agencies…. Derivatives had become a uniquely unregulated financial instrument…. The Securities and Exchange Commission changed the leverage rules for just five Wall Street banks in 2004… [which] ramped leverage to 20-, 30-, even 40-to-1…. Wall Street’s compensation system was skewed toward short-term performance…. Subprime mortgages… market… dominated by non-bank originators…. The Fed could have supervised them, but Greenspan did not… lend-to-sell-to-securitizers model… automated underwriting systems… Glass-Steagall… was repealed…. In 2004, the Office of the Comptroller of the Currency federally preempted state laws regulating mortgage credit and national banks….

Bloomberg was partially correct: Congress did radically deregulate the financial sector, doing away with many of the protections that had worked for decades. Congress allowed Wall Street to self-regulate, and the Fed the turned a blind eye to bank abuses. The previous Big Lie — the discredited belief that free markets require no adult supervision — is the reason people have created a new false narrative.

June 22, 2015

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