Look, it’s perfectly possible to explain the sittutation clearly and concisely:
* starting in 1977, we’ve increasingly forced banks to make more risky mortgages by government fiat
* in order to reduce the risk, mortgage backed securities were invented
* in order to pass risk from more risk-averse firms to less risk averse firms, credit default swaps were invented.
* the quasi-governmental agencies that bought mortgages and pushed these mortgage backed securities, full of political cronies and spending big on lobbying , were in obvious danger; there were extensive calls for greater regulation and better oversight, starting in at least 2001
* the danger was pooh-poohed, largely by people who were receiving big contributions from the lobbyists.
* when the quasi-governmental agencies that has financed and securities the mortgages collapsed, many people who had trusted that the government sponsorship of these agencies made then extremely safe, found they had lost a lot of money.
* when they then decided to get out of the risky securities, even at a loss, mark to market caused everyone else to mark their securities down too — which caused them to lose value, which those people to sell as well, in a vicious cycle
* which caused the credit rating agencies to down rate a lot of firms, which then triggered the credit-default swaps
* and firms which had sold credit default swaps found themselves with demands that they pay cash for this suddenly illiquid security
* which caused the illiquidity crisis
The illiquidity crisis and the general panic in the markets for mortgage backed securities and associated credit default swaps made it very difficult to evaluate who might and who might not fail:
* with no reassurance that they could be paid back, people stopped issuing loans in the commercial credit and interbank market.
* which, if it continues, could at any pretty much any time cause payrolls to fail and retail business to be severely hurt (like “no bread on the shelves” hurt.)
* which would be a very very bad thing.Footnotes:
- Community Reinvestment Act, signed by Jimmy Carter in 1977 [↩]
- Franklin Raines, Jim Johnson, Jamie Gorelick [↩]
- Senate: Top recipients, in order of total career amounts: Dodd of CT, Obama of Illinois, Kerry of Massachusetts, Clinton of New York. Top recipients in dollars per year in the Senate: Obama of Illinois, Clinton of New York. House: by total: Frank of Massachusetts,… [↩]
- President Bush warned of the danger 18 times since 2001. Sen. McCain authored a bill in 2005/2006 to force better accounting standards and independent oversight. [↩]
- These bills were defeated, thanks in part to the efforts of Dodd of Connecticut, Obama of Illinois, Kerry and Frank of Massachusetts, and Clinton of New York. [↩]