The cause of the whole financial collapse of cards is actually fairly simple. Risk was not correctly priced when it came to mortgage loans. Why?
1) You had Congress tampering with risk pricing through Freddie and Fannie.
2) Credit Default Swaps, which are really insurance policies, are not regulated as such. Credit Default Swaps are the sacred cows of the banking industry because they allow almost unlimited leverage.
You can also expand this to include:
3) Lack of basic financial knowledge on the part of most of the populace.
4) Reduction in concepts of personal responsibility on the part of a large portion of the populace. (Entitlement generation).[/quote]
Actually it is way more simple than that. Financial bubbles have been around since the middle ages. It is by no means a new socio-economic phenomena and has been very very well understood for a long time. Collective madness finds a way – combined with the information age, financialization of everything and mass media it can be a killer, literally. Understanding herd mentality, coupled with influence over media and politics you can sway investors from one asset class to the next pumping and dumping the whole time.
From the 19th century
Extraordinary Popular Delusions & the Madness of Crowds
