There is an implicit understanding that the Fed will serve the interests of Wall Street by facilitating asset bubbles through "accommodative" monetary policy and by blocking regulation. This is far more damaging than any conspiracy because it ensures that the economy will continue to stagnate, that the gigantic upward transfer of wealth will continue unabated, and that the chasm between the rich and everyone else will grow.

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What follows here is based on an article by Mike Whitney at http://www.informationclearinghouse.info/article25367.htm

Bush, Greenspan and many other high-ranking officials understood the problem with subprime mortgages and knew that a huge asset bubble was emerging from them that threatened the real economy. But while the housing bubble was more than just an innocent mistake, it wasn't caused by any kind of "conspiracy," which Webster defines as, "a secret agreement between two or more people to perform an unlawful act."

No, it's actually worse than that, because bubble making has become the predominant endeavor on Wall Street, and is being used by the financial elite to bypass the inherent 21^st century structural problems of capitalism itself, mainly stagnation.

The main stakeholders in Wall Street's bubble-making agenda didn't need to convene any kind of conspiratorial meeting to decide on what they wanted or how they were going to get it. They already knew what they wanted; all they needed was a process that would help them maintain profitability even as the "real" economy remained stuck in the mud. And that process quickly became obvious to all of them. UCLA history professor Robert Brenner has written extensively on this topic and easily dispels the mistaken view that the real economy is "fundamentally strong" (as claimed by former Treasury secretary Henry Paulson).

Here's Brenner's explanation:

"The current crisis is more serious than the worst previous recession (1979- 1982) of the postwar period, and could conceivably come to rival the Great Depression. Economic forecasters have underestimated how bad it is because they have over-estimated the strength of the real economy and failed to take into account the extent of its dependence upon a buildup of debt that relies on asset price bubbles. In the U.S., during the recent business cycle of the years 2001-2007, GDP growth was by far the slowest of the postwar epoch. There was no increase in private sector employment. The increase in plants and equipment was only about a third of the increase in the previous period, and was a postwar low. Real wages were basically flat. There was no increase in median family income for the first time since World War II. Economic growth was driven entirely by personal consumption and residential investment, which would not have been possible without easy credit and rising house prices. Economic performance was weak, even despite the enormous stimulus from the housing bubble and the Bush administration's huge federal deficits. Housing by itself (it's growth fueled by the newly relaxed requirements for getting a mortgage) accounted for almost one-third of the growth of GDP and close to half of the increase in employment in the years 2001-2005. It was, therefore, to be expected that when housing prices stopped going up and the housing bubble burst, wages, consumption and residential investment would fall, and the economy would plunge." (Wages were simply too low to allow workers to buy enough of what was being produced.)

(Source: "Overproduction, not Financial Collapse, is the Heart of the Crisis," Robert P. Brenner speaks with Jeong Seong-jin, Asia Pacific Journal) Click here

What Brenner describes is a "real' economy that's flat on its back, an economy that -- despite unfunded tax cuts, massive military spending and gigantic asset bubbles -- can barely produce enough to be described as "positive growth.'

The problem for the banksters was (and is) that the pervasive lethargy of our mature capitalist economy poses huge challenges for industry bosses who are judged solely on their ability to boost quarterly profits. Goldman's Lloyd Blankfein and JPMorgan's Jamie Dimon could care less about economic theory and the vitality of the real economy; what they're interested in is making money by the most lucrative means available. All they care about is how to deploy their capital in a way that maximizes return on investment. "Profits," that's it. Nothing else matters, least of all the real economy, which they no longer need to bother with.

The origins of Wall Street's new alternative financial universe

Maximizing profits is much more difficult in a world that's saturated with overcapacity and flagging demand, as ours is. In general, the world now tends not to need more widgets or widget-makers. Therefore, the only way to ensure profitability was to invent an alternate money-making system altogether, a new universe of financial exotica (CDOs, MBSs, CDSs) that operates independent of the sluggish real economy -- in short, a very profitable gambling casino in which the "smartest guys in the room" can systematically and repeatedly bilk the rubes. "Financialization" was just the ticket. It allows the main players to pump-up the leverage, minimize capital outlay, inflate asset prices, and skim off record profits even as the real economy struggles with, and endures, severe stagnation.

Financialization provides banksters an excellent and unprecedented path to wealth creation, which is why this sector's portion of total corporate profits is now nearly 40 percent. It's a way to bypass the now pervasive inertia of the production-oriented "real' economy. The Fed's role in this new paradigm is to create a hospitable environment (low interest rates) for bubble-making so that the upward transfer of wealth can continue without interruption. Bubblemaking thus became the new "standard operating procedure."

Scores of people knew what was going on during the subprime mortgage fraud fiasco

Robert Rubin, Alan Greenspan, Timothy Geithner, and others have been defending their reputations by disingenuously asking, "Who could have known about this mortgage fraud and where it would lead?" But many people knew. In September 2004, the FBI began publicly warning that there was an "epidemic" of mortgage fraud, and it predicted that this epidemic would produce an economic crisis if it were not soon dealt with." Click here

The FDIC also knew. In testimony before the Financial Crisis Inquiry Commission, FDIC chairman Sheila Bair confirmed that she not only warned the Fed of what was going on in 2001, but cited particular regulations (HOEPA) under which the Fed could stop the "unfair, abusive and deceptive practices" by the banks. Also, the Fitch rating agency knew, and even Alan Greenspan's good friend and former Fed governor Ed Gramlich knew. (Gramlich personally warned Greenspan of the surge in predatory lending that was apparent as early as 2000. Here's a bit of what Gramlich said about this in the Wall Street Journal:

"I would have liked the Fed to be a leader" in cracking down on predatory lending, Mr. Gramlich, now a scholar at the Urban Institute, said in an interview this past week. Knowing it would be controversial with Mr. Greenspan, whose deregulatory philosophy is well known, Mr. Gramlich broached it to him personally rather than take it to the full board at the Fed. "He was opposed to it, so I didn't really pursue it," says Mr. Gramlich. (Source: Wall Street Journal Click here)

So, Greenspan knew, too. And, according to Elizabeth MacDonald, in an article titled "Housing Red flags Ignored":

"One of the nation's biggest mortgage industry players repeatedly warned the Federal Reserve, the Federal Deposit Insurance Corp. and other bank regulators, during the housing bubble, that the U.S. faced an imminent housing crash. But bank regulators not only ignored the group's warnings, top Fed officials also went on the airwaves to say the economy was "building on a sturdy foundation" and a housing crash was "unlikely."

So the Mortgage Insurance Companies of America [MICA] also knew. And, here's a clip from the Washington Post by former New York governor Eliot Spitzer who accused then president George W. Bush of being a "partner in crime' in the subprime fiasco. Spitzer says that the OCC (Office of the Comptroller of the Currency) launched "an unprecedented assault on state legislatures, as well as on state attorneys general -- to make sure the looting would continue without interruption. Here's an except from Spitzer's article:

"In 2003, during the height of the predatory lending crisis, the OCC promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules. (Source: The Washington Post Click here)

So the Fed knew, the Treasury knew, the FBI knew, the OCC knew, the FDIC knew, Bush knew, the Mortgage Insurance Companies of America knew, Fitch ratings knew, all the states Attorneys General knew, and thousands of traders, lenders, ratings agency executives, bankers, hedge fund managers, private equity bosses, regulators knew. Everyone knew, except the unlucky people who were then victimized in the biggest looting operation of all time.

Once again, looking for conspiracy just diverts attention from the nature of the crime. Here's a statement from former regulator and white collar criminologist William K. Black, which explains the nature of that crime:

"Fraudulent lenders produce exceptional short-term "profits" by way of a rather devious strategy: extreme Ponzi-like growth by means of lending to a great many uncreditworthy borrowers, thus continually driving up the price of housing as unprecedented numbers of "qualified' buyers flood the market. This is then combined with extreme leverage as these mortgages are securitized, stamped triple-A, and sold at top dollar to unsophisticated clients around the world, with all of this being backed by minimal loss reserves at the banks of origin. The exceptional "profits" thus generated defeat regulatory restrictions and destroy private market discipline. The unprecedented profits thereby generated . . allow the CEOs to convert company assets into immense personal benefit through seemingly normal compensation mechanisms. The short-term profits cause stock options to appreciate. Then the CEOs, following this new strategy, are guaranteed extraordinary income while minimizing risks of detection and prosecution." (Source: William K. Black, "Epidemics of 'Control Fraud' Lead to Recurrent, Intensifying Bubbles and Crises," University of Missouri at Kansas City -- School of Law)

In a nutshell, investment banks and other financial institutions bulked up on garbage loans and complex securities backed by dodgy mortgages so they could increase leverage and skim off large bonuses for themselves. Clearly, they knew the underlying collateral was junk, just as they knew that eventually the market would crash and millions of people would suffer.

However, while it's true that Greenspan and the Wall Street mandarins knew full well how the bubble-game was being played; they had no intention of blowing up the whole system. They simply wanted to inflate the bubble, make their obscenely huge profits, and get out before the inevitable crash. But, then something went wrong: When Lehman collapsed, the entire financial system suffered a major heart attack. All of the so-called "experts" models turned out to be wrong.

Here's how it went down

Before the meltdown, the depository "regulated" banks got their funding through the repo market by exchanging collateral (mainly mortgage-backed securities) for short-term loans from the so-called "shadow banks" (investment banks, hedge funds, insurers). But after Lehman defaulted, the funding stream was severely impaired because the prices on mortgage-backed securities kept falling. When the bank-funding system went on the fritz, stocks went into a nosedive, sending panicky investors fleeing for the exits. As unbelievable as it sounds, no one saw this coming.

The reason that no one anticipated a run on the shadow banking system is because the basic architecture of the financial markets has changed dramatically in the last decade due to deregulation. The basic structure is now different -- the traditional stopgaps have been removed. That's why no one knew what to do during the panic. The general assumption had been that there would be a one-to-one relationship between defaulting subprime mortgages and defaulting mortgage-backed securities. That turned out to be a grave miscalculation. The sub-primes were only failing at roughly 8 percent rate when the whole secondary market collapsed. Former Treasury Secretary Paul O'Neill explained it best using a clever analogy. He said, "It's like you have 8 bottles of water and just one of them has arsenic in it. It then becomes impossible to sell any of the other bottles because no one knows for sure which one contains the poison."

And that's exactly how it happened. The market for structured or packaged debt crashed, stocks began to plummet, and the Fed had to step in to save the system.

And now, unfortunately, that same deeply-flawed system is being rebuilt brick-by-brick without any substantive changes

The Fed and Treasury support this effort because, as agents of the banks, they are willing to sacrifice their own credibility to defend the primary profit-generating instruments of their industry leaders (Goldman, JPMorgan, etc.). That means that Bernanke and Geithner will go to the mat to oppose any additional regulation on derivatives, securitization and off-balance sheet operations -- the same lethal devices that triggered the financial crisis first time around.

In conclusion, there was no conspiracy to blow up the financial system, but there was, and still is, an implicit understanding that the Fed will serve the interests of Wall Street by facilitating asset bubbles through "accommodative" monetary policy and by opposing regulation. It's just "business as usual." And it's far more damaging than any conspiracy because it ensures that the economy will continue to stagnate, that the gigantic upward transfer of wealth will continue without pause, and that the chasm between rich and everyone else will continue to grow.

Authors Bio:

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 always been more interested in political economics and what's going on behind the scenes in politics, than in mechanical engineering, and because of that I've rarely worked more than 8 months a year, devoting much of the rest of the year to reading and writing about that which interests me most.