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How Was It That So Many Members of Our Middle Class Were Financially Crushed?

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In short, this book is a carefully constructed chronicle of the systemic greed and hubris, clueless shortsightedness and incompetence that brought the US financial system to its knees.   However, in many ways it fails to place or assess blame.   The authors make clear that the fundamental hidden assumption that drove the collapse (and that proved to be fatal in the end) was the ultimately mistaken notion that home prices would continue to rise indefinitely.   Feeding this blind and almost lemming-like assumption were a host of enabling factors, most of which straddled the borders of both immorality and corrupt business practices.   Every one of the participants listed in the book was in part complicit and culpable, but some more than others.   Yet the authors always "pull their punches" when it comes to assessing blame.   To wit:


Loan standards were weakened until they were non-existent.   Lenders, as well as the recipients of loans, were together drunk on the home-lending madness, which, driven by Congress and Freddie Mac and Fanny Mae, became a kind of national orgy.  


The ratings of the rating agencies were worthless, primarily because they not only lagged the housing market but at the same time depended on, and pandered to, the very companies and markets they were trying to rate.  


Rules regarding capital requirements became worthless, and thus increasingly were skirted -- as was generally true with other aspects of the mortgage creation process.   This continued throughout the evolution -- or should we say devolution? -- of the process.


The train of packaged loans (which would often prove, eventually, to be virtually worthless pieces of paper) were leveraged to the sky, without even a semblance of an institutional safety net.   Insurance on the loan packages, the CDSs -- as well as the CDOs (Collateralized Debt Obligations) too -- eventually proved, in many cases, to be worthless.   Bankers lied to themselves and to their buyers, just as the buyers lied to them selves -- all in an orgy of mass delusion and self-deception, which came to have a self-reinforcing life of its own, that could not be turned around or turned off.


Many homebuyers were greedy & irresponsible borrowers:   The mortgages they owned were not so much bought by them as sold to them;   and what the owners got in turn was not so much a home that was really theirs, but rather a piece of paper that in many cases eventually became worthless.  


Regulations were in place sufficient to manage the mortgage creation process, but were not enforced .   Nor as the book makes clear, can we ever guarantee that any regulations will ever be enforced.   Nor for that matter can we guarantee that any rating agency can exist as a truly independent (and thus valid) rating agency.   Its effectiveness is totally dependent on the culture and enforced laws that surround it and that must be used to help supervise it.


In the end, the CDOs amounted to a clever version of a Ponzi scheme -- primarily because they provided ever more markets and investors, and allowed banks to ever more profitably leverage their exposure, while brokers continued to get paid their lavish bonuses, thereby allowing everyone to ignore the inevitable, and live with their heads in the sand for yet another profitable day -- which they all did, until the collapse in home prices finally ran the entire gravy-train off the tracks.

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)

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