Who is to blame for the Financial Crisis

The short answer is humanity.

The longer answer is human emotions and group think which run in trends (today we will make good use of my simple sense analysis program by both reducing to the absurd and noticing the power of trends). We have all heard that fear and greed drive investment decisions. Those emotions and others drive silly trends including the high and low fashion of leisure suits http://www.shaunsayre.com/70s/fads/leisuresuit.jpg to 5 button suits (or women’s hemlines up and down).

Why on earth would anyone wear a leisure suit (please see link above)? Well because some famous actors are wearing them, and all the good looking girls at the bar are hanging out with guys wearing them and next thing you know you got a closet full of leisure suits and a pet rock on your dresser.

Why on earth would anyone make a NINJA (no income, no job, no assets) loan? Why would someone agree to take on a monthly mortgage payment that they had no chance of paying off? Same reason; and it’s all totally rational.

Imagine you are CEO of a big financial institution. All your peers are making lots of money making loans to slightly more risky borrowers. If you choose not to pursue a similar strategy your stock price will go down and you with either lose your job and or your company will be bought by someone who is making these loans. Basically it is career and company suicide not to make these loans.

Imagine you live in a world where the stock market goes up 100% a year every year. All your friends are heavily invested in the stock market and making a ton of money, but you think the stock market is overvalued or you don’t have the risk tolerance to join in. With all their profits they are driving up the price of everything (food, education, housing, heath care etc). If you aren’t heavily invested in the stock market you find you can’t buy as much stuff as you used to. You are becoming much poorer relative to everyone else. You can either choose to become poor, or join in with everyone else.

So being human and functioning in a society sometimes results in powerful self reinforcing trends which sometimes result in closets full of leisure suits and other times results in silly lending. For sure other things aid and abet these trends like securitization or P Diddy pimping leisure suits, but let’s call this an ugly aspect of the human condition. So if you want to know who is at fault—we all are. If you want to waste time finding someone to blame—we all are. (And while I am at it Congress please stop with the blame game—if you are telling me you would have loaned the Big 3 money if they had flown to DC on Southwest using rapid reward points but won’t because they flew on their corporate jets (VERY STUPID but still) then you are not really thinking about how best to spend our money or solve a problem you are just looking for a scapegoat). We are humans—we will have good times and bad, accept it.

Tomorrow how to prevent this from happening again—and if you didn’t like today’s post you are really gonna hate how you cure the human economic condition.