The Root Cause of the World’s Economic Meltdown – Insatiable Greed

A few days ago Alan Greenspan, the former Chairman of the Federal Reserve, said that he was shocked that our financial system has broken down.  He said that we are in the midst of a credit tsunami and that, “I still do not understand exactly how it happened”.  In short, our nation’s, and indeed the entire world’s economy, has been threatened with disaster because of bad loans, and Mr. Greenspan doesn’t understand how this happened.  Over the long years that he was Chairman of the Fed he oversaw the creation of a system of financial operations whereby the banks and other financial institutions would regulate themselves.  Greenspan believed that they would be careful in their decision making because if they made ill-advised loans they would suffer the inevitable financial loss.  It seems that this didn’t quite work. Our financial institutions were only too happy to make idiotic loans to people who had utterly no ability to repay them and in the process the world’s financial system is on the brink of collapse because the world’s financial institutions all wanted to play this new game.

Mr. Greenspan professes not to understand how this could happen, so I thought I would give him a little help.  The cause of this seemingly strange behavior by the world’s financial institutions was not “irrational exuberance” -  that is Alan’s term for us little investors who get duped into making dumb investment decisions and then get taken to the cleaners by the big boys at the investment houses. I would say the proper term to describe the behavior of the financial institutions would more appropriately be “insatiable greed”.  Given that, by their very nature, bankers are greedy, I use the term “irrational” to denote those loans that had interest rates so high that any intelligent person would know they couldn’t possibly be repaid. So we have mortgages and credit card debts with excruciatingly high interest rates, which periodically get adjusted higher and higher, and we have the poor people who got saddled with these mortgages and credit cards who had no idea they had entered credit hell.

This, however, was only step one for the greedy banks. They’re not completely stupid, in fact they seem to be a lot sharper than Mr. Greenspan. These banks knew that these really shaky loans were really hot potatoes so they protected themselves by selling the loans as soon as they made them to some unwitting bank on the other side of the world. This was made easier by lumping a whole bunch of these loans together and then slicing and dicing them and repackaging them so no one had a clue as to which package had which loan.  All that was left was for the ratings agencies to certify that these were AAA-rated, mortgage-backed, securities and everybody bought them.  Of course these buyers also bought insurance for these securities from insurance companies like AIG who called this insurance a “credit default swap”.  There was also a host of “derivatives”, i.e. other things the banks could sell that derived their value from these loans – things like options and futures. The market for credit default swaps and derivatives was a hot one too, and the best thing about the whole thing was that there were (thanks in part to Mr. Greenspan)  no regulations because the banks were policing themselves – out of their own self-interest (despite the fact that they were selling these worthless investments as fast as they could). It’s a shame that Mr. Greenspan can’t get his arms around this…

Well, of course the inevitable happened. The people who got in and got out early made enormous fortunes and the poor “stuckies” who got left holding the worthless pieces of paper went broke. They were basically cheated by the fast talking, crooked, financial institutions who sold the loans and the derivatives to them and forgot to mention that the loans were made to people who couldn’t possibly repay them.  So much for self-policing. Someone should tell Mr. Greenspan that this is a good example of why we have regulations – it’s because there are plenty of greedy people out there who have no internal moral compass and who will do or say anything to cheat you out of your money. A lot of these people seem to choose careers in finance.  These people need to be watched all the time, Alan. The have insatiable greed and they think they can beat the system and they don’t care who gets hurt as long as they make a fortune – and a lot of them did.

This isn’t only Alan Greenspan’s fault.  It’s also the fault of Senator Phil Gramm who wrote legislation that eliminated many of the banking rules that had been created during the Great Depression because everyone knew that the financial institutions were a bunch of crooks then. It’s the fault of Senator John McCain who has made a crusade out of deregulation, whose ideal form of the marketplace is no-rules capitalism.  It is the fault of all the “pure” capitalists, like George Bush, who fail to believe or even care that pure capitalism is like a car with no speed controls, no brakes, and no steering wheel. It is the fault of bankers and financial people who believe that pure capitalism is a religion that you must believe in or else you are not an American. But mainly, it is the fault of the intelligent people who knew from the beginning that the wheels would eventually fly off. They knew they had to flip the loans as soon as they made them. They knew they could make a quick buck, but then they had to get out fast. They knew that the outcome would eventually be a disaster for the world’s financial systems that they had poisoned with millions of worthless loans.

If Alan Greenspan truly wants to understand what happened he need only look at the really smart people who profited from this debacle, the people who knew what would happen when they made and sold worthless loans, but eagerly participated anyway out of their irrational greed, and out of their complete lack of morality or caring what happened to anyone else in the world.  It was these no-rules capitalists who knew exactly what they were doing who created Alan Greenspan’s credit tsunami.

It’s such a shame that poor Alan doesn’t understand, isn’t it?