Saturday, November 15

A View On The Collapse

In Greed We TrustI've heard a lot of politically motivated talk about the global financial crisis. There are some who'd like to place all the blame at the feet of a couple of government programs.

However, I'd like to highlight one of the factors that I consider important. It tangentially deals with the issue of regulation.

The reason for our crisis can be put down to one simple word. Greed!

It was reckless greed when the rating agencies, having no clue how to rate the mortgage derivatives simply declared them as AAA and accepted their payment for assigning a rating.

It was greed when the banks originating mortgages created incentives for closing deals and then turned a blind eye on how these mortgages were actually structured when sold to end consumers.

It was greed when credit default swaps, an unregulated financial vehicle which serves the same function as regulated insurance, were sold with the assumption that housing prices would never go down, such that there was no need to maintain reserves for defaults on the loans they insured.

It was greed when unsophisticated purchasers didn't look closely enough at the terms of their deals and they thought they were getting a great deal on their mortgage from the banks when they weren't.

It was greed when the fat cats at the top made huge profits on this process, especially when at some point they actually knew how and why housing defaults were increasing but they continued to milk the process for all it was worth.

It was greed when banks, pension funds, and investors around the word saw great supposedly low-risk AAA rated mortgage derivatives and snapped them up without looking into them deeply enough to determine that they were risky.

It was greed when the fat cats mentioned above used their offshore accounts to sell their own companies short when they knew the bottom was going to fall out. I don't have any proof of this, but I'd very surprised if it didn't happen.

The result, greed has taken a toll on the global financial system and in the process hurt the average North American consumer. Billions have been sucked out of their pensions and investments. Billions.

So, where does this leave us. Am I against free markets? Not at all. Am I against capitalism? Not at all. Personal and corporate financial motivation is certainly an appropriate decision making mechanism. However, greed is a very powerful force, and some level of wise regulation needs to be in place if we are to maintain an environment safe for the average working family.

Frugal Guy said...
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6 comments:

Anonymous said...

I could not agree with you more. I had the privelage of working for one of the best employers in the world. They were driven out by the geed of a Japaneese company that stold thier ideas. Good luck to you. Hopefully good values will save the world. Annette

jason said...

I work for Wikinvest.com, an investing wiki with that covers companies, personal finance topics like 401(k) Plans and Auto Insurance, and concepts like oil prices and the credit crunch. I've been approaching top bloggers identified by our business development team about the Wikinvest Wire, a traffic-boosting, invitation-only blogwire for investing and personal finance blogs. We launched the Wire in early October and our Wire members have seen a significant jump in traffic and benefited tremendously from links to their blog showing up on other blogs and Wikinvest. Allow me to run you through some of the Wire's main features.

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Frugal Guy said...

Annette, thanks for the note.

Jason, I'm trying Wikinvest, though I'm not sure I like the effect on the look of my blog... you may want to add some customization options.

Debt Consolidation said...

Greed as in the greed of Democrats to keep the Fannie Mae slush fund going so they could fund things ile Acorn

Frugal Guy said...

Debt,

Nice, leave spam and at the same time inject some political spin into the discussion.

However, without getting into the politically spun aspect of it, I can agree that Fannie was busy lobbying in Washington. You might be surprised to find I believe their is a culture of entitlement by those in Washington, on both sides, that has everyone looking out for themselves instead of for us.

Seriously though, I think you need to look at things a lot more closely than the political talking points of either side.

debb said...

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Debb