An article in Rolling Stone of interest to those on both sides of the debate about better regulation of Wall Street and the Financial Industry. Cast a different spin on "the crisis", its roots and the best ways to correct/prevent it.
WillyB: Having worked very closely with financial institutions I think that article hit the nail on the head. For about 20 years I brokered commercial real estate deals, and made my own. I sold property, virtually all of which was purchased on a leveraged basis. It involved loans from financial institutions. As referenced earlier I sat in on loan decisions in the 1980's. There is a scary aspect to the financial industry. In my experience it is disconnected for a period of time from the world of demand and supply. Its able to operate independantly of what would be normal constraints from demand and supply. In doing so, it might book tremendous profits for a period of time. Then its excesses f*ck up. Its happened too often. Here is an example. http://www.fairfaxcountyeda.org/site...ns/ye08rer.pdf The graphs on pages two and 10 indicated clearly how excess financial investment from financial institutions operated independently from simple demand and supply. The lower graph on page two shows how vacancy rates skyrocketed from 1980-1990. Either the top graph on page 2 or the top graph on page 10 show how much new development there was year after year. New development continued unabated even as vacancy rates had soared to a point wherein buildings weren't earning money for their investors. This occurred over years. Why didn't the supply of buildings stop? Why didn't investments dry up? It clearly wasn't working with vacancy rates that high. (In fact rents were flat--I know, I was brokering lease deals at the time.) The financial institutions are removed from the normal operating processes that control supply and demand. Crappy accounting doesn't account for the volume of loans, the tendency to pour all one's money into one type of investment vehicle, and the risk incurred. Its not there for anyone to discern. It escapes from the rules of demand and supply. OTOH; if it was one's own portfolio, you'd know exactly how much you had poured into real estate, how risky it was, how much into business loans, how much into bonds, art, etc. etc. But with financial institutions its hard to see. The same thing occurred this decade. The financial institutions found that mortgage lending was the most profitable short term lending process. They all did the same thing. Then they twisted the rules. The started making infinitely riskier loans at rates never before seen; sub prime, variable rate, alt A's etc. Lots more than ever before. They not only packaged and sold these loans, but they bought them themselves. They couldn't package and sell them off fast enough. The massive subprime lenders were caught with huge inventories of crappy sub primes that defaulted. The buyers were caught with packages of crappy loans that were defaulting. Everything tumbled. On top of that the entire highly leveraged credit default derivatives only made money off of heretofore unallowable leveraging. Major lenders/investors were leveraging their investments with virtually no equity. Here is the essence of real risk when you are leveraged at about 97% loans and 3% equity. Everything has to work perfectly. If a few things f*ck up, cash flow falls below the ability to pay off the enormous leverage and loan balance. Then things begin to cave. If everything f*cks up, the entire highly leveraged animal crashes. Meanwhile, the banks are insulated from normal rules of demand and supply that would catch excesses at an earlier period. Unfortunately major banks control the worldwide economic situation. If they collapse, you won't be able to borrow money to build things before you can sell them. If they collapse, your bank savings are wiped out. Everything goes down the tubes. When financial institutions yell and scream that they need to be left free of oversight and regulations it is giving the crooks the keys to the castle. How many times do we need to go through this to not see that there is a tremendous disconnect between financial institutions and the basic rules of demand and supply? How many times do we need to see the financial industry create incredible financial bubbles and then take the rest of us down with them? Its criminal. Take a look at the graphs. Don't listen to the screamers for unregulated freedom to do whatever they want whenever they want. "screamers for unregulated freedom to do whatever they want whenever they want". Frankly that sounds like a baby and a brat to me.