Whether the Volcker Rule becomes law one day or banks get broken up or bankers are forced to accept 5 figure paydays or long/short hedge funds are deemed legally riskier, by some systemic risk regulating czar, than long only mutual funds who get mauled in bear markets, we can all be confident that we’ve learned nothing about what was the genesis of the credit bubble and what can be a foundation for responsible behavior in the future. The genesis being artificially cheap money whose sole intention is to encourage borrowing, artificial demand in housing spurred on by the financing of FNM and FRE and the inability to allow failure as a result of bad decisions that can be controlled by bankruptcy law. But I digress. Global stocks continue their China led correction, earnings season relative to expectations is mediocre and Greece remains a problem as their 10 yr bond yield is rising to the highest since 2000.

Category: MacroNotes

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “Have we learned nothing?”

  1. rww says:

    The genesis wasn’t cheap money. It was stagnant wages and outsourced jobs.

    We didn’t borrow because money was made cheap. Money was made cheap because we had no choice but to borrow.

    (Well, we had a choice of course, but it would have meant the collapse of demand etc a decade earlier.)

    So, yes, we have learned nothing.

  2. CTB says:

    Or, maybe it was all of the above.

    Here’s to hoping that the Volker Rule allows for orderly bankruptcy of all deserving financial entities!

  3. foxmuldar says:

    Pressure put on Freddie and Fannie and other institutions to lend money on the cheap to folks for overpriced homes certainly played a big part in the eventual collapse of the Housing and Banking sectors. But I put much of the blame on those who’s homes are now being forclosed on. Many never should have qualified for a credit card much less a mortgate on one of those overprices homes. Others got caught buying and selling for a profit. When the market crashed, many got caught holding multiple propertys. The banks ended up forclosing on those homes.

    People got hooked on the American dream of everyone deserves to own their own home. Thats so much BS, if you can’t afford a $200,000 home, then don’t buy it. I wonder how many of those cash for clunkers autos are now being repossessed from folks who once again bought what they couldn’t afford? There’s plenty of blame to go around.

  4. franklin411 says:

    Completely agree. Robert Reich has been very good about pointing out that credit was used as a crutch to compensate for the fact that good jobs were being exported overseas and wages have been flat since 1980. In fact, wages adjusted for inflation even declined during the 2000s. The Bush administration used cheap credit and a housing bubble to give people the illusion of prosperity, and it worked brilliantly for 7 of 8 years–despite getting royally reamed, stupid people voted time and again for the guy they’d rather “have a beer with” than the guy who was pounding the table for the American worker.

    Cheap credit was only a symptom, not a cause.

  5. Brendan says:

    @foxmuldar: the problem with the “blame the irresponsible homeowner” game is that it ignores the real problem. If I’m Joe the supposedly irresponsible homeowner, when I go to buy a home, I get a real estate agent, you know, a professional in the industry, to tell me what’s a good deal. Then I hire another professional to tell me how much I can borrow based on my income. Then, when I pick a house I like, I hire another professional, an appraiser, to tell me how much it’s really worth (so now I have two people telling me that I’m paying a fair price). Then I pay the roughly 3% the seller tacked onto the home price so he/she can pay my real estate agent, I pay thousands of dollars in “closing costs” so that the mortgage broker will serve me, and have dished out a few hundred more so someone can come and look at the house and say “yup, what you’re paying is what it’s worth.” Yet somehow, when I get a loan to buy a house and find out that I’ve spent thousands upon thousands of dollars on professionals to provide me services, they failed to do so. But hey, it’s my fault for not doing the due diligence (even though I paid professionals to do it for me). How dare I rely on seasoned industry veterans to give me a fair opinion, even though I’m paying their salaries! Apparently everyone who buys a house should be an accountant.

    This is like saying if I get sick from taking a combination of pills my doctor prescribes me, it’s not the doctor or the pharmacist’s fault, and I should just suck up the consequences. Why didn’t I know that those two chemical compounds in the drugs react adversely? You know, i shouldn’t have taken the drugs until I thoroughly studied the chemistry of them! How dare I blame the professionals I hired and paid!

  6. saunderscc says:

    Artificially cheap money certainly played a large role as it forced banks to look to other sources of profit. However, the genesis of this “mess” really entailed many ingredients.

    It is important to realize that credit derivatives also played a major role in creating free-flowing credit. As banks were able to shift credit risk while simultaneously reducing capital requirements, it enabled them to make further loans.

    Loans being made in the cheap money era weren’t terribly profitable AND tied up a more regulatory capital. The consequence was to securitize nearly everything.

    The blind-faith-reliance on models, including those of the rating agencies, combined with the notion that default risk had been eliminated, when combined with the hyper-competition amongst banks for profits inevitably meant that the quality of the ingredients that went into the sausage declined to such low levels that disaster became inevitable.

    There is ample blame to go around for this debacle. Banks, the government and associated regulatory bureaucracies, borrowers, boards of directors and others are all to blame. None of this could have happened without participation from all guilty parties.

    Now we have to sit and watch finger pointing, blame shifting and revisionist history in the media which is watched by a populace that on average can’t balance their checkbooks. It’s just more rotten sausage from a different machine.

  7. John says:


    Ultimately we as consumers are responsible for our own actions. This is true whether we are dealing with doctors, lawyers, realtors, and any other profession. Blind faith in anyone is potentially dangerous, so we should always monitor, question, conduct some due diligence, and understand as best we can the actions of those whom we hire. We should never let any professional dictate to us what to do.

    Realtors, appraisers, and mortgage brokers certainly deserve blame. Many others deserve blame too, such as lenders, investment banks, ratings agencies, investors, government agencies and regulators (a long list here), congress, the news media, and no doubt many more. There is plenty of blame to go around, but it begins and ends with consumers.

  8. wngoju says:

    Mr Ritholtz, WTF? I though you were agin the CRA/Freddie/Fannie explanation for the crisis. Low rates to some extent, but what about

    a failure by the Fed to supervise non-bank lenders; An abdication of lending standards by both banks and non-banks; Radical deregulation of financial markets; the now discredited belief that markets can self-regulate; a shadow derivative market allowed to operate unlike every other financial product; Compensation schemes that rewarded short term risk taking over long term profitibility; Increases in leverage to the major investment houses from 12-to-1 to 35-to-1


  9. johnborchers says:

    Totally agree with RWW. That’s my same point. People didn’t want to stop saving, there was no choice.