More on Financial Crisis

Found this alternative view on the financial crisis at Hassanmarghub’s Blog on WordPress.com.

What Really Lies Behind the Financial Crisis?

What was the true cause of the worst financial crisis the world has seen since the Great Depression? Was it excessive greed on Wall Street? Was it mark-to-market accounting?

The answer is none of the above, says Jeremy Siegel, a professor of finance at Wharton. While these factors contributed to the crisis, they do not represent its most significant cause.

Here is the real reason, according to Siegel: Financial firms bought, held and insured large quantities of risky, mortgage-related assets on borrowed money.

The irony is that these financial giants had little need to hold these securities; they were already making enormous profits simply from creating, bundling and selling them. “During dot-com IPOs of the early 1990s, the firms that underwrote the stock offerings did not hold on to those stocks,” Siegel says. “They flipped them. But in the case of mortgage-backed securities, the financial firms decided these were good assets to hold. That was their fatal flaw.”

So, the whole meltdown comes down to a simple simultaneous misjudgment by every investment banker of note in the world.

Well, we can all breathe a sigh of relief now that Siegel has taken the burden of causal analysis for the crash off our shoulders with this sweeping bit of reductionism. But shouldn’t any true explanation of a catastrophe contain within it a clue to preventing its repetition? Siegel’s begs the question, “why” did the bankers decide to hold on to these “assets”?

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One thought on “More on Financial Crisis

  1. The reason the banks held on to the mortgage bundles was a combination of greed and stupidity. Under the heady illusion that the bubble would never burst, that prices on real estate would continue to rise and rise and rise, like a balloon, they missed their opportunity to sell when they could have make a profit. One of the reasons why you don’t let banks invest in securities. Their greed blinds them to the real people.

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