@Cycloptichorn,
Cycloptichorn wrote:
Let us ask a simple question, George, and see if you can answer it while also maintaining the party line: As there have been MANY boom-bust cycles in housing in the past, what exposed our nations largest banks and financial trading houses to this risk? What financial product lead to the immense investment in Mortgages, an unprecedented investment, that we saw? What was different THIS time from previous times?
I do not believe you will be able to answer this question, without proving both to yourself and to the readers of this thread that there was a definite factor which was responsible for our financial crisis that cannot be explained away by mutterings about the housing market's cyclical nature, or blaming the government. But I'd love to see you have a go at it.
Cycloptichorn
The current recession in this country and throughout much of the world is largely the result of cyclical factors, and augmented in various parts of the world by significant local considerations. For the United States and many nations of Western Europe, the collapse an asset bubble involving housing and property values was a main driver. In addition, particularly in Europe, overleveraged, undercapitalized banks played a role, as did the combination of bloated social welfare programs, over-regulated labor markets and demographic changes (fewer workers) that worsened the other effects. Demographic changes involving the retirements of baby boomers in the United States also played a part.
Economic recessions and collapsing asset bubbles are hardly new. They are a reoccurring fact of economic history. The unusual fact about the current recession – and the main problem we face today - is its persistence and the very slow recovery that has followed it. Indeed it is not clear that in The United States and several European nations we will fully recover any time soon: global balances of economic power are changing.
If your question is simply why did Lehman Brothers fall, then I'll grant you that the collapse in the credit default swap market was a main culprit. However, to infer, as you do, that this was the sole, or even the main reason for our current recession and, even more to the point, our unusually slow recovery from it, defies the facts.
The CDS market collapse had very little to do with the banking failures in Latvia, Estonia, Ireland, Iceland or the very serious challenges faced by banks in the UK, France, and Germany (most of their bad assets or loans were local). It had nothing to do with the collapsing property & construction bubble in Spain and the bloated government programs there that have slowed recovery. It had nothing to do with the financial crisis in Greece that has further endangered European banks and the Union's currency & financial systems.
More to the point here the CDS market was only one of several factors that fed excessive capital into an expanding property bubble in this country. The steadily increasing securitization of mortgage loans by Fannie and Freddy, which endlessly recapitalized lenders and separated them from the ultimate performance of the long term loans they were making; and the Community Reinvestment Act, which set arbitrary quotas for loans in certain zip codes to advance social goals, also played equally important parts. A very good argument can be made to support the proposition that the emergence of the CDS market itself was an after-the-fact reaction (albeit inadequate and illusory) of financial markets to the earlier and unwise policies of the government in driving capital towards the mortgage market, which themselves were the driver in the eventual collapse.
Obama's main failure was in his decision to carry on with his prepackaged political and environmental agenda in the midst of a serious cyclical economic reversal. Instead of facing this fact and adjusting course, he has chosen to endlessly recite the mantra of his inheritance of an economic mess – asking us in effect to also blame his predecessor for his own ineptitude in dealing with the situation before him (and to exclude his own political party, which then controlled the Congress, from association with its causes).
