[quote=Rich Toscano]I like sdduuuude’s answer, but I have to put Greenspam first and the ratings agencies second.
The agencies were the lynchpin to the whole mortgage crisis, so they bear huge responsibility there. However, Greenspam was asleep at the wheel for not one but two world-beating asset bubbles. No, scratch that — he wasn’t just asleep at the wheel, he was a cheerleader for both bubbles. And the mop-up from the first bubble basically created the environment that allowed the second and much worse bubble.
His “reign” was truly catastrophic and I just hope he clings to life for long enough to witness the final outcome of his legacy (the nigh-inevitable US govt funding crisis) and, if there is any justice, the resulting complete destruction of his reputation as a central banker.
Rich[/quote]
Great post, Rich. 🙂
Yes, Greenspan is the #1 culprit because (IMHO) he probably had a hand in every aspect of the bubble. He cheered on the “financial innovation” that made the bubble possible, and I’m sure he well understood what the possible ramifications would be.
I’m sure he personally knows people within the ratings agencies, and he certainly knows people who work for the various regulatory agencies, and he certainly knows people who work for the largest financial institutions in the nation/world. There is no way these topics didn’t come up in formal or informal conversations during the early years of the bubble. This is why I don’t believe for a second that “nobody saw it coming.” Everybody who was anybody knew exactly what was going to happen, but they were all making so much money, nobody dared to stop the bubble in its tracks.
Yes, the ratings agencies are at the top of the list, but I also think that “innovation” that supposed reduces risk by “spreading it out” (does that make it “systemic”???) is one of the biggest causes of the final, blowout stages of the bubble. The two are interconnected because the ratings agencies took the derivatives into consideration when rating the securities.
Financial insurance should not exist, IMHO. It gives investors a false sense of security, and hides the true cost of the risks that are being taken. We didn’t see risk priced in the bond market (higher interest rates) because the **opaque** derivatives market was (supposedly) absorbing that risk. If I were god of the financial sector, I would ban derivatives with the exception of a very small market that is closely regulated and monitored.
