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Levy Rivers's Library tagged crisis →  View Popular

04 Apr 09

Our Epistemological Depression — The American, A Magazine of Ideas

  • This time, too, there is an underlying commodity bubble, namely in housing. But it has had much wider ramifications, because financial institutions have become interconnected in two unprecedented ways. First, once distinct financial services became interconnected: banking, credit, insurance, and the trading of derivatives have become interlinked because they are conducted by the same companies. Second, financial institutions are more connected across national borders, so that there are entities across the globe that invested in toxic American-made instruments and are suffering as a result (including municipalities in Norway that invested tax revenues in American collateralized debt obligations, now worth 15 percent of their face value).
  • There were governmental errors: monetary policy that was too loose; government monitoring agencies that were too lax; and government policies specifically intended to encourage home ownership among African-Americans and Hispanics that had the unintended but quite anticipatable effect of extending mortgages to those who lacked the ability to repay them. There were perverse alignments of market incentives, incentives that put personal interests at odds with corporate interests, and corporate interests at odds with the public interest. There were principal-agent problem within firms, where traders were remunerated with bonuses for selling collateralized debt obligations without regard to the long-run viability of the underlying assets. Rating agencies were corrupted because they were paid by the sellers of the goods they rated, offering unreliable evaluations that redounded against the purchasers of mortgage-backed securities. Large profits were made by companies that packaged and sold mortgages and mortgage-backed securities without needing to be concerned with their ultimate viability.
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