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I'm going to go back to the core problem that started the world careening to financial ruin; The collapse of the US sub prime market. Let's look at the players involved and what went wrong.
1) The end customer. These were people who were buying properties they could not afford with very cheap loans, either because they were stupid, or very shrewd. The stupid people were the ones that didn't really understand how thier mortgage worked, ie that it would get much more expensive in 2 or 3 years. These were people who believed that the value of thier property would just keep going up forever. They took on either very low rate initial period loans, or even worse the self amortizing variable rate mortgages that actually paid the interest payments out of the mortgage loan itself, ie. to the borrower it appeared to be free, but the underlying debt got bigger and bigger. The shrewd ones where those who owned no real collateral, so bankruptcy wasn't an issue.. someone was effectively saying you could live somewhere for free for a couple of years, after which you'd declare yourself bankrupt and leave the keys under the mat.
2) The Mortgage broker. These people were greedy, but at the end of the day they were just doing thier job, which was to sell loans to people. They were salespeople, paid on a number and if they could get thier number and make lots of money because the lenders were stupid enough to let them sell loans to people who were never going to pay them back, then really, who can blame them.
3) The mortgage lenders. Again, greedy, but just doing thier job. They were able to sell debt on and take thier cut, effectively with no risk to themselves, so bully for them
4) The banks. Greedy, but just doing thier job. They found a way of buying loans from the morgage lenders, packaging them up in bonds, getting an AAA stamp, and reselling them to either investors (stupid) or...
5) other banks, who then packaged the worst of the bonds, the ones that couldn't get a decent rating into CDO's (Collateralised Debt Obligations) which could get a good rating. Why? Because the Banks managed to persuade the ratings agencies that if a CDO consisted of lots of different types of bad loans it was 'diverse', which meant it was safe, bingo, AAA rating. It was basically like saying here's a pile of cat poo, here's a pile of dog poo, and here's some pidgeon poo.. If I put them in this box, shut the lid, and shake it about a bit, hey presto.. gold!
And why did people buy these CDO's? Becasue they had good ratings, and some of them, the really dodgy ones made up of the worst bonds payed amazing yields. In fact the really dodgy ones were so popular that there weren't enough to go round, so people started making synthetic CDO's, which had no real debt, just Credit default Swaps.. pure gambling.
So everything went a bit crazy, as people were making money because the system broke down, because like water always rushes through a crack, money will always eventually find a crack in the system it can exploit, and rush through. Now I'm not saying capitalism itself is flawed, because the crack is very easy to fix once you know where it is. And where is the crack...? Well, what has been missing for the last couple of decades is someone to effectively do the checks and balances, in other words...
6) the ratings agencies. And here in my opinion is the core of the problem. If there was one thing I had to point my finger at and say THIS is where it all went wrong, it would be the ratings agencies. They are the most guilty, because all the above, whether stupid, or greedy, or both, were just doing thier job.. the ratings agencies job was to make sure things didn't run away with themselves. They failed. They didn't do thier job. Why? 3 things. Firstly, the kind of people who tend to work at Ratings agencies are not as strong willed as people who tend to work on trading floors, so there was an element of bullying going on. Secondly, and more fundamentally, the ratings agencies are not government bodies. They are companies, and are in competition with each other. They are competing for banks' business, so we have free market conditions in play in an area where they just shouldn't be, ie. between an industry and it's regulator. This is where things broke down. This is the core of the whole problem. It is not in any of the ratings agencies interest to tell a bank they are wrong, as there is a threat the bank will go to another agency for it's ratings. So they just did as they were told. Remember the 3 types of poo? Well, the bank would go to the agency with a box, with a nice ribbon around it, and get a AAA stamp. The ratings agencies would do this without raising the lid.
So this is why, In my opinion, this whole mess could have been avoided if the ratings agencies did thier job. And the fact that they were, and still are, in competition with each other, means that we are at risk of the same thing happening all over again.
It amazes me that hardly anything is said about this. There were a few comments when they downgraded the US last august, (ie. why does anyone listen to these jokers when they gave sub prime debt AAA), but the fact is, people still do listen to them. They need to be renationalised, as at the moment we have a flawed system, and it's very easy to fix. All the complex plans of ring fencing, recaptialisation, bailouts etc.. etc.. in the long run they won't help if at the core of the system there is someone turning shit into gold.
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