Understanding the Current Financial Crisis
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David Berhitoe
2012-05-21 19:27 Financial Crisis Mortgage Securities
This flowchart tries to explain the basic points in the current mortgage crisis. The story is probably an old one. People try to get the maximum return on their money. Big returns have big risk. Investors may not have realized this, but the risk was there. The two yellow boxes in the chart above show where regulation failed. Normally a bank wouldn't give a loan to someone who had no income and no assets and such mortgages combined together should not have a high rating. By elevating these toxic mortgages to triple A an enormous amount of wealth was generated. However, this wealth disappeared when their true value was determined. This will all happen again, but in a different way.
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  • Bryan Lund 2012-07-31 20:17
    David,regarding the yellow boxes...when you talk about the banks not worrying about the risk...I have to wonder why they didn't worry?

    Re: your comment on "the story is probably an old one." I think this speaks to the heart of the problem. The government is planning another round of the same process you describe here, but the legislation(regulation) is what is driving it again. Stealing other peoples' money through involuntary, coercive law is the oldest trick in the book. Using the governments coercive power of force is the easiest way to get your hands on big money, not worry about risk and leverage it for a larger return than normal. Read up on the Austrian's Boom/Bust Business Cycle theory and you can learn more about how people loot others using the government.

文件内容:[Fed founds rate lowered in 2001,Enough securities,RatingsOK?,Banks don't worry as risk is passed on,Big money looks for a better return,Too many homes have been built so prices fall,No,Mortgage securities true ratings become known,Fed lowers rates again in 2008 to see what other mischief can be created,End?,Start,If you don't give good ratings, your customers will go elsewhere,Everythingfine?,Lower requirements for mortgages,Use old data to make ratings look OK,Homeowners default on mortgages they couldn't afford,Buy mortgage backed securities,Banks react to the bad securities by not loaning money,Yes,Understanding the Current Financial Crisis]