Wikinvest Wire

Dodd identifies the root cause of financial crisis

Tuesday, September 23, 2008

They are all up on Capitol Hill at the moment - Treasury Secretary Hank Paulson, Fed Chairman Ben Bernanke, and SEC Chairman Christopher Cox - talking about the financial crisis and the $700 billion proposed bailout.

It's going to be like one big group therapy session. Hopefully, someone will feel better after it's all done, but it probably won't be the U.S. taxpayer.

You can watch it live on CSPAN 3 if you're looking for something to do to pass the time.

Senator Chris Dodd (D-Conn.), who chairs the Senate Banking Committee, spoke first and, right off the bat, you know that we are all just sooooo screwed in this whole affair.

In yet another example of how the entire country is in denial regarding the unsustainable nature of the current system of seemingly endless money and credit expansion (well, actually, credit expansion seems to be stopping rather abruptly lately), Senator Dodd said just a few moments ago:

As I and many members of this committee have argued in the past 17 months, since I became chairman of this committee, the root cause of our economic crisis is in the collapse of the housing market triggered by what Secretary Paulson himself has called bad lending practices.
The root cause of the collapse of the housing market doesn't seem to get much attention these days - it should. It's kind of like the history of the Great Depression that, according to most economists, begins in 1929 when the stock market collapsed and conveniently omits the nearly decade-long expansion of money and credit that preceded it.

Most people would like to think that the history of the financial crisis begins when we were all wealthy beyond our wildest dreams due to rising home prices and that, somehow, we can just revert back to that time. But, it actually begins long before that - back when this particular asset bubble began to inflate.

Sadly, with this kind of thinking, we'll get nothing but Band-Aids from here on out.

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Anonymous said...

More on root cause from:

In his testimony, Bernanke said the housing market crash has been a key factor in both the economic slowdown and financial market turmoil. "Falling home prices and rising mortgage delinquencies have led to major losses at many financial institutions, losses only partially replaced by the raising of new capital," Bernanke said.

The Treasury secretary said the roots of the current crisis reach back years, starting with shoddy lending standards and borrowers who took on mortgages they couldn't afford.

Anonymous said...

This one too from Wilbur Ross

Bankruptcy expert and investor Wilbur Ross said on Monday that none of the recent actions to stabilize the financial system addressed the root of the problem -- helping Americans make their mortgage payments.

"The reason I think it will take that long is that none of these actions that have just been taken make it any easier for Middle America to meet their mortgage payments -- it doesn't address that whole problem, and that problem is what really caused this to begin with."

friggin' clueless, these people

Anonymous said...

"borrowers who took on mortgages they couldn't afford."

because all lenders are at the mercy of thier customers. Especially when Rover the mutt gets his own credit card.

James Howley said...

I think the financial crisis has more to do with a culture of Corporate Greed and self-indulgence. You can blame one man but it's not the easy money. It's what we did with it or not.

Tim said...

Despite what you might think from the name of the blog, I've never blamed just one man. But, the important point remains that you can't do what we did without easy money. Central banks and regulators effectively have "veto power" over this sort of thing (by design) and chose not to use it.

taxpayer said...

We are in this current financial mess because the idiots in congress legislated the banks and financial instutions grant mortage loans to people who don't have to have proof they have a job have no credit history and grant no doc mortgages Its convenient to blame wall street but it was congress that turned the dogs loose The democrats are quick to solve the crisis without investigation of the cause because they caused the problem....

David said...

What is the root cause of the “bad lending practices” ?

I like many other home owners thought it was great when the housing market was booming. Now the bubble has burst who is to blame ? The banks who wanted to maximise profits, the home owners who wanted to borrow more maximising their profits, or the politicians who encouraged the banks to build the bubble to win election‘s. Did the politicians see past their own popularity, banks care about those that could not get on the housing ladder, did I ? Perhaps if we had thought more for others and less for ourselves this financial mess would never have happened.

The problem is rooted deep in our egoistic nature. A quote from Michael Laitman expands this better than I can:-

“At the foundation of human behaviour, driving all economic and social systems, is the ego, which always prefers the narrow personal interests of investors and stockholders, over the common good of the public. The pursuit of wealth, honour and control at the expense of others are the top priority for company owners.”

sal said...

I disagree with blaming Greenspan. I beleive that the 2 main causes of this crisis are:

1) lenders not adhering to guidelines

2) borrowers taking on more debt than they should have, which is a function of my first point.

for more info this article is excellent:

Anonymous said...

What an idiotic reaction-- to blame the defaulters! Just what the banks want us to focus on. What is it about our culture that we need a scapegoat-- preferably poor and minority? Wake up stupid angry people: the banks are to blame, not the people defaulting on their loans. It is the banks' job to decide who to loan money to and how much to loan them. If someone cannot make their payments they lose their property-- that is their risk, and that is what happened-- they all lost their properties. There is only a problem if the banks make way too many risky loans, which they did. They over extended themselves-- en masse thanks to unregulated Reaganomic idiocy that the market can take care of itself. Also note that a lot of the defaults are not from poor families who over-reached, but from speculating investors who way over-reached on many properties simultaneously and then abandoned them when they got in over their heads (too many people signed up the real estate telemarketing scam courses advertised on cable tv). The banks made too many loans and did not assess their risk levels properly and that is why we are suffering. I know it's really hard to get mad at mostly rich white guys, but they are the greedy ones who fucked things up.

Anonymous said...

You are right Tim, manipulation by the Fed is the problem. If market forces were at work instead of artificial expansion and then the subsequent slamming of the door by the Fed when the boom got too big caused this problem. The people taking advantage of the stupidity of the banks are not to blame. They are to blame for their family's demise not the industry's downfall.

jerry said...

what about the de-regulation under reagan-bush era? there were guidelines to protect us until they were abolished so the rich could get richer. which led to our current crisis. bush 41 is the worst person in our history. he is guilty of almost everything and has gone unpunished.

Tom said...

Dear Bloggers.

Apparently some of you have not taken ECON 101.

Were leveraged because we have outsourced our way to financial ruin. will help refresh some of the groupthink that made us forget Economics.

Quote: All economics is trickle down economics. There is no such thing as trickle up economics.

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