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Tuesday, February 15, 2011

It was leverage stupid! And that always plays a role in most all finacial meltdowns.


http://www.nytimes.com/roomfordebate/2011/01/30/was-the-financial-crisis-avoidable/address-excessive-leverage

2 comments:

jay said...

Yes, leverage is the problem! Housing policy alone could never have caused the crisis because it would have dried up savings from both directions. The increase in loans reduces the supply of savings/loanable funds. The consumption that is a result of increased leverage also causes savers to spend and invest, further reducing the supply of loanable funds. The reduction in the real supply of savings would have driven rates up before the bubble even began. It is the control of the interest rate and Fed's guarantee to supply more credit that creates bubbles and devalues our currency. $1 today will buy what $0.02 would buy in 1913.

If banks were not subsidized by the Fed and FDIC and tax payers then their sole concern would be determining depositor's demand for their own money so that they could attempt to make a little on what they have determined is safe to lend. The 10% reserve ratio is a joke, the market should determine reserves and the most conservative banks should always be most successful, not those who take the most risk. A free market would never lead to a situation in which people were competing to produce and sell junk loans as quickly as possible.

Its funny, all of the mistakes that the government has made actually prove that the market is very rational. Deductions for health insurance and health care destroy price competition because everyone wants to pay with before tax dollars via a third party. Easy money leads to over consumption and credit bubbles. Entitlement programs lead to welfare queens and make people compete to appear worst off. My mother has been teaching for about 30 years now and she once had a young student approach her and tell her that white people were stupid. He said, "If you went to get a welfare check you would probably go dressed just as you are wouldn't you?" My mother said well yes I guess I would. He was very proud to inform her that his mother puts on her worst clothes and then goes and picks up a few of the neighborhood kids and makes them take off their shoes and come into the welfare office with her. Given the incentives, this sounds to me like very rational behavior from even the poorest in society.

Jeffrey said...

Could you tell it was me? Different account :)