Wall Street turned a few million home-loans into what Warren Buffet called "economic weapons of mass destruction," cratered the global economy, and then, when the bubble burst, turned around and insisted on a massive bailout courtesy of the American tax-payer.
That rightly infuriated most Americans, and yet it has become an article of faith among most Republicans that Wall Street bears little blame for the Great Recession. The dominant narrative on the right today is that "big government" is ultimately responsible for the crash. Many claim that Democratic lawmakers like Barney Frank and Chris Dodd "brought down the banking industry by forcing banks to give loans to people who couldn't afford them." But no bank was ever "forced" -- or coerced or incentivized, by the government in any way -- to make a bad loan.
The claim falls apart even before one digs into the particulars, for the simple reason that people's mortgages didn't bring down the banking system in the first place. To wit:
The entire subprime mortgage market was worth only $1.4 trillion in the fall of 2007, and that includes loans that were up-to-date. As former Goldman Sachs trader Nomi Prins noted in her book, It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street, the federal government could have **bought** every single residential mortgage in the country -- good, bad and in between -- and it would have cost a trillion _less_ than the bailouts!
Short of that, notes Prins, if the crisis were really about people buying homes they couldn't afford, "we could have stopped the crisis much more cheaply , in a couple of days, in late 2008, by simply providing borrowers with additional capital to reduce their loan principals! This solution would have cost about **3%** of what the entire bailout wound up costing!
What really brought down the global economy was as much as $140 trillion worth of financial gimmickery built on top of the mortgage industry. I refer of course to the alphabet-soup "financial instruments" of the credit meltdown -- the CDOs, MBSs, default swaps and other derivatives -- that turned less than a trillion dollars of foreclosed loans into an economic weapons of mass destruction that would ultimately cost the American economy $14 trillion in lost wealth.
Deregulation: The Government's Role in the Collapse
As Joshua Holland reports on Alternet, a fair criticism of the government's role is that it didn't "meddle" in the free market sufficiently to protect borrowers, investors and the public -- i.e. it inadvertently allowed a $140 trillion house of cards to be built in an environment created by decades of deregulation. But that situation is also the fault of Wall Street rather than simply an indication of the perfidy of "big government." Legislators were bought with $5 billion in campaign contributions by the banking lobby -- and yes, as powerful chairs of congressional banking committees, the right's bogeymen, Barney Frank and Chris Dodd, were two of the financial industry's top recipients of this largesse.
The meltdown began to precipitate during a chance meeting in 1997 at Bank of America's Chicago headquarters. People working in BofA's derivatives group happened to get into a discussion with another team that was packaging mortgages into securities. From that meeting, a new financial gambling game was born: bankers began to use subprime loans to create a new kind of financial instrument or salable security, which actually consisted of bundled packages of risky loans, which they called collateralized debt obligations (CDOs), and they began marketing and selling these packages of risk, worldwide, on an explosively large scale, to people and institutions that had no idea of the risk entailed.
In the mid-1990s, JPMorgan had found itself holding an abundance of these risky subprime loans on its books, which made it difficult to maintain the reserves required by banking regulators. So they came up with the very clever idea of actually _selling_ some of the risk they wanted to get rid of, to duped investors. They did this by bundling them into mortgage-backed securities (MBSs). This had terrible consequences that would eventually lead to the almost universally loathed Wall Street bailouts, a massive drop in employment, the foreclosure crisis, and a skyrocketing deficit.
In addition to the secrecy employed in these scams (which was followed by the housing market collapse, and thus the huge loss in value of all these "financial vehicles" that had been created and sold -- which then required the massive bank bailout), what is most appalling is that the bailout loans, to some of the biggest banks in the world, were made with no strings attached, no conditions, and no negotiation to achieve any broader public purpose. Even if one accepts the notion that the stability of the financial system could not be sacrificed, those who dispensed trillions of dollars to private parties . .
- made no apparent effort to impose even minimal obligations to condition the loans on the structural reforms needed to prevent another crisis,
- made no effort to require that those responsible for creating the crisis be relieved of their jobs,
- took zero steps towards the genuine mortgage-reform that is so necessary to begin a process of economic renewal.
The dollars lent were simply a free bridge loan so the banks could push onto others the responsibility for the banks' own risk-taking.
If ever there was an event to justify the darkest, most conspiratorial view held by many that the alliance of big money on Wall Street and big government produces nothing but secret deals that profit insiders--this is it.