HOW BANKS BROUGHT ABOUT THE FINANCIAL COLLAPSE
- They threw risk management out the window.
I could go on about the Glass-Steagall Act in the USA, but let’s keep things simple. The banks consciously took a decision to keep using escalating real estate sales prices as security for loans, even though land prices had developed into massive bubbles. Any half-decent risk analysis asks whether the point has been reached where land prices cannot be sustained at these levels – because every major recession has always followed such a collapse in land prices.
- Banks were secured by their fall-back position.
An understanding took root within the top echelon of banks that finance, insurance and real estate (the ‘FIRE‘ sector) having been permitted to develop into a behemoth—much more now than a service sector to the real economy—could never be permitted to fail.
- The circle was now ‘squared’.
This combination of poor risk analysis and the belief that banking and finance was now “too big to fail” set banks on a course of naked rent-seeking. The more they lent, the more the real estate bubble would inflate, the larger indebtedness to the banks would be, and the greater would become their profits …… Until the bust, that is, at which time it would be they, not people enmeshed in impossible debt, who would be bailed out by taxpayers.
Political interference in this scenario became ‘impossible’—at least from the banks’ viewpoint—and banks had clout. To call banks out on blatant rent-seeking in inflated mortgages would bring this house of cards crashing down – and the big bankers knew it. The meme became that banking must survive – intact.
It was not a consideration that bank survival under these terms must come at the expense of wages and profits in other sectors of the economy, and that a twenty-year zombie Japanese-style debt deflation must ensue.