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I have encountered a few people who do argue that government regulation caused the economic crisis. It seems to be the dominant understanding in the conservativ

by ewzimm 10y ago

I have encountered a few people who do argue that government regulation caused the economic crisis. It seems to be the dominant understanding in the conservative media in the United States, possibly elsewhere. The reasoning goes something like this: people in government wanted to redistribute wealth by building up impoverished minority communities, so they incentivized otherwise responsible banks to lend money to people who would not have qualified for loans and punished banks that did not meet certain minority quotas. Banks responded to this pressure in the only way they could by giving out loans to minorities who then defaulted. Banks couldn't change the government initiatives, so they bundled bad loans with good to try to control the damage and save the economy, but too many minorities were irresponsible. The government then made the problem worse by adding even more regulation on banks, slowing the economic recovery and extending the recession. I don't personally subscribe to this, but it does seem to have a lot of weight with a certain crowd. It's also used as an example of how minorities and government are the source of other problems in the country, so the only way we can solve the problem is through deregulation, giving more freedom to the financial industry, and ending any sort of affirmative action.

bubbleRefuge 10y ago
You may answer them by stating the fact that bank management committed fraud by making loans based on false appraisals and false documentation provided by borrowers and then selling these "assets" (with the help of corrupt ratings agencies) to uninformed institutional level investors . As intermediaries banks profit from the transaction fees. This is fraud plain and simple. The public at large doesn't understand the banking system and how it is funded. Banks fund loans by creating deposits out of thin air. They don't loan money from their depositors. Because of this, they must be and are carefully regulated.
- generj 10y ago
  Absolutely. The banks further profited by investing their own money - something we then prohibited them from doing, as it made them far too risky. Essentially the banks had abnormally high returns, which is almost always a sign of high risk. The entire purpose of regulation is to force the banks to be boring, low-risk low-return options so they have a very low chance of failing. People seeking high-returns can then go to the stock market or hedge funds, which are much less likely to be 'too big to fail'. The public is also unaware that nearly every substantial banking regulation was created as the result of a bubble, recession, or depression. We need strong bank regulations in order to prevent financial crises which can cause global depressions. Throwing away regulations when everything is going well is much like throwing out all that error-handling code your application has built up over a decade. Sure, you get better performance initially...

by ewzimm 10y ago

bubbleRefuge 10y ago

You may answer them by stating the fact that bank management committed fraud by making loans based on false appraisals and false documentation provided by borrowers and then selling these "assets" (with the help of corrupt ratings agencies) to uninformed institutional level investors . As intermediaries banks profit from the transaction fees. This is fraud plain and simple. The public at large doesn't understand the banking system and how it is funded. Banks fund loans by creating deposits out of thin air. They don't loan money from their depositors. Because of this, they must be and are carefully regulated.

generj 10y ago
Absolutely. The banks further profited by investing their own money - something we then prohibited them from doing, as it made them far too risky. Essentially the banks had abnormally high returns, which is almost always a sign of high risk. The entire purpose of regulation is to force the banks to be boring, low-risk low-return options so they have a very low chance of failing. People seeking high-returns can then go to the stock market or hedge funds, which are much less likely to be 'too big to fail'. The public is also unaware that nearly every substantial banking regulation was created as the result of a bubble, recession, or depression. We need strong bank regulations in order to prevent financial crises which can cause global depressions. Throwing away regulations when everything is going well is much like throwing out all that error-handling code your application has built up over a decade. Sure, you get better performance initially...