A leftie analyses the Financial Crisis of 2008

This is the 3rd part of the "Leftie Serie" which I created after attending the People & Planet Conference on the 8th of March 2014. 
Here's a link to the other posts: Feminist Economics, Inequality

Here's a passage from page 14 in The Austerity Machine, a pamphlet I got at the Leftie conference, that is just so entertaining! On page 14 it tries to explain the origin of the 2008 financial crisis which is such a great example for how the left likes to look at the world: superficiously, of course, and with very little insights.

"Banks continued to give new loans even when it was clear the borrowers would not be able to repay. The sub-prime mortage crisis in the US, which sparked the financial crisis, was a clear case of banks targetting poor borrowers, selling them expensive mortgages that they could not repay. Although this doesn't sound sensible, the banks had a strategy: they sold on the mortgages to other banks and investors in 'bundles', 'packaged up' with good mortgages so they looked less risky. This is just one example of the way finance started developing new ways of trading, to hide high levels of risk." - Economic Justice Project

Now, this is just like the famous Keynesian economist Paul Krugman goes on about everything; He's not technically lying or stating incorrect statements, but he twists them and hides certain facts that change the meaning of what he's saying.

Same thing here. Yes, the crisis originated in the US, it occurred after a housing boom, banks did sell 'Sub-prime mortgages' and they did mix them into packages with high-credit mortgages, obtaining AAA-credit rating on those products. Yes, they targeted the poor (thus: 'sub-prime', = below prime: that is costumers that actually can't afford/support a loan because they, for instance, had no income). That is, banks were injecting risk all over the financial system and these risks were hidden through the rating given to them.

The left makes this look like how the banks are awful, how their greed deliberatly caused the world economy to crash - and especially that bankers are so obsessed with their trading that not even risk matters to them.

Let's think about bankers and evil capitalists that only wants to make money for a moment. Let's assume these traits are true. What, in a free market, stops these capitalists from going crazy, lending money to everyone in order to make as much profits as possible? The risk of loosing the initial money, obviously. If they loose their own money after going mental, that's their lose - no problem for the rest of us.

Now, let's wonder for a moment why bankers did sell loans to poor people that clearly couldn't sustain them, or why they even would do that to begin with. Sub-prime costumers represented a HUGE risk for bankers, why would they risk their capital to low/no-income borrowers who would never be able to pay that money back? The left story is simple; because they're evil, greedy and want to exploit the poor as much as possible. The more truthful story is a bit more technical. Since the Clinton era in the US, there had been a political goal of making all Americans own their homes - not too different from UK politics. For this reasons, the administration used something called Government-Sponsored Enterprise (Fannie Mae & Freddie Mac), designed to purchase mortgage loans from other banks, making sure normal banks always had a second market for their loans. Essentially, the risk associated with lending money to someone was transferred to these companies. Banks lended to everyone because Fannie and Freddie would buy that mortgage straight away - leaving the banks with initial profits, but Fannie and Freddie with all the risks.

Fannie and Freddie (and further down the line, Goldman Sachs or Leeman Brothers etc also) packaged these "risky" loans with proper, "good" loans into a financial product, which, by the incentives of rating agencies and Fannie & Freddies government-sponsorship, recieved AAA ratings and were deemed to be very safe. Effect: banks, investors and individuals around the world bought them, because they yielded good returns, while on paper exposing them to very low risk.

Now, when the debtors of the initial bad loans eventually defaulted, a domino fell through the system, causing loses to be made all over - and the rest is, as they say, history.

Yes, if you want to make the superficial analysis that "look, a product bankers made spread risk throughout the system - IT'S THE BANKER'S FAULT!", you can make that. It just simply doesn't deal with the fundamental mistakes made that eventually caused a financial crisis to occur.
Misguided incentives, however, does. Politically-governed idea that "all should own their home", an interest rate held substantially below its market rate and the hydra of moral hazard that GSEs, Sub-Prime purchases and Bank Bailouts represent are more accurate explanations. 

Stop messing around with absurd accusations of "bankers and SPECULATION causing the financial system to crash". Politicians and messed-up incentives did. Like governments, state and politicians do most of the time.

This is a perfect example to when Lefties take one glance at something, find an explanation - regardless of how inaccurate it might be - that fit their worldview and start accusing one of the following 1) capitalism, 2) bankers, 3) rich people, for x, y and z.

Sorry guys, it doesn't work that way.


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For an extensive story on the Financial Crisis see here, or a more technical, economic debate, see Austrian Theory of the Business Cycle.