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The Real Cause Of The Crisis

what really caused the capital markets of the world to fall into such crisis.

By Joel Ross | Updated on January 02, 2012

I have always believed that housing was only a manifestation of the real problems with the capital markets. Subprime mortgages is just the easy thing for politicians and reporters to talk about because they have no understanding of what really went on. Now 60 Minutes is trying to claim it was all caused by CDS on home mortgages which they try to claim is just like illegal gambling.  The reality is there were much bigger and worldwide things going on which all coalesced to create a massive bubble.

Following the recession of 2001-2, the whole world seems to have gone on a debt binge the likes of which the world has never seen. It was not just US residential and subprime paper, it was everything. Iceland decided to become a hedge fund and loaned money or invested in assets all over the world with no expertise in Iceland to know anything at all about what they were doing. The head of their central bank was a poet by training. The finance minister was a veterinarian. The Spaniards built enough housing for two or three generations. The PIIGS ramped up entitlement programs to a degree that makes the US entitlement crisis look moderate. Leveraged loans were increased to levels sufficient to buy almost any company. Through all of this there was a sense that, we can sell the paper so let’s do it. Sound finance and underwriting was tossed aside, and by 2007, there was absolutely no discipline left anywhere. It was as though everyone knew they were going to die soon, so why not party like hell into the night. It was a massive bacchanal.

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