Don’t Be Fooled, There Was Nothing ‘Financial’ About the 2008 Crisis
15th September 2018
The thing I like about this article is that when the author says ‘people who think X are wrong’ he tells you why in very easily understandable terms that make sense to someone not formally trained in economics. That doesn’t mean he’s right, of course, but it improves the odds.
One thing that I would object to is the headline, which I think is sufficiently imprecise as to be misleading.
What does ‘finance’ mean? When one says ‘I’m going to finance a purchase’, what is that sentence intended to convey?
‘Finance’ means ‘pay for’. And (typically) use of the term ‘finance’ for a transaction means that you are paying for what you’re buying by means of borrowing money from someone else.
The ‘financial system’ is the set of interrelated economic relationships composed of all of the people who are borrowing (and lending) money for the purpose of making purchases. In the case of a business, this can be for buying raw materials, machinery, land, trucks, new employees, bribes to government officials, whatever needs to be bought that you don’t have the cash on hand to buy. In the context of housing, it refers to people borrowing money in order to purchase living space, i.e. mortgages.
The fundamental flaw in the mortgage financial system that underlay the 2008 ‘crisis’ was the constant unrelenting pressure from government to lend mortgage money to people who don’t deserve it, i.e. were not good credit risks. The Politically Correct principle thus expressed is ‘being inclusive’ and ‘helping the underserved’. The assumption is that Fashionable Minorities are not getting the mortgages that they would get if they were Privileged Whites because of racism/sexism/bigotry/homophobia/women-and-minorities-hardest-hit CrimeThink. (That pressure still exists, by the way; when faced with a choice between reality and ideology, politicians will pick ideology pretty much every time if that’s the way to get votes.)
The financial institutions succumbing to this pressure were desperate to find some way of reducing the hideous economic risks that such lending brought to their businesses. They way they did it was basically a shell game, bundling these shit mortgages with good ones and fudging the numbers so that the result would smell like something other than shit, and selling this bow-tied shit to people who didn’t go to the effort of unwrapping it. So, in that sense, the ‘crisis’ arose because of financial shenanigans by people trying to make some money while actually satisfying Big Brother.
The problem with such a system, as with any Ponzi scheme, is that all it takes is one solid hit somewhere for the entire thing to collapse. As it did.
What the author is saying is, that the reason this became a ‘crisis’ was the ham-handed government intervention that attempted to keep all of the plates spinning and hope somehow that it would go away. So, in that sense, the headline is correct — if you boldface the word CRISIS. The situation was financial but the crisis was political; but that doesn’t come across through a casual reading of the headline.