I do not believe that it was lack of regulation that caused the current problem and I believe that a system with less government intervention, within a proper framework of laws is the best in long run. I think that most of the actions by the Obama administration will not resolve the underlying problems and may actually make the problems worse. The laws of unintended consequences applies. I do not support bailing out home owners, the banks and bankrupt industries (like the auto companies).
In my opinion, there are two key factors for the current problem: 1) Most are aware that it is the collapse of the housing boom that is contributing to the current problem. I submit that if there were more controls (higher reserve requirements) like in Canada and Spain (which had an even crazier bubble), we would not have such a problem in the US. However, I believe the real problem was that there was very little enforcement/verification of the financials of the borrowers. In California where I used to live, and now one of the epicenters of the crisis, it was quite easy to get solicited with all kinds of bogus loans. Often there were little or no checks on people's credit and people were getting loans that allowed for negative amortization, easy refinancing (borrow on one's loan) etc. Furthermore, every Tom, Dick and Jose was getting into the frenzy of buying a home, which kept bidding the prices up. To me, the alarm bells were ringing way back in 2004, when it was apparent that the so called home P/E ratio was getting way out of whack as defined by home price to rental ratios or by ratios of home prices to population income. If there is negligence, it is because borrowers, or the loan brokers, were lying about the borrowers incomes in order to qualify for loans. This is where the real crime was, deregulation or not. The existing rules were simply not being enforced. The crisis started when the the sub prime borrowers started defaulting. The next hammer to hit will be next category up, which is the so called Alt A group. This is expected to peak in 2010. The problem now is that it now extending to the prime borrowers, who are now being affected because of the overall downturn. Look at the stats below and weep: http://www.bloomberg.com/apps/news?pid=20601068&sid=an7bb8PA_CqY I think that while the actions by the current administration may provide temporary relief, I feel it will be a false dawn as it does not address the fundamentals of the problem. The next level of failure with regulation enforcment was with the loan ratings agencies such as Moodys who gave a blanket 5* rating to all the debt, irrespective to its source. I think this is criminal and I for one, fail to understand why action is not being taken against such institutions. The consequence of this is staggering. It meant that insurance companies (such as AIG) drastically underestimated the risks of the loans and issued CDOs to the sellers of these loans. That is why when the loans started failing, it was not only the banks that started failing, but also the insurance companies that backed the banks. The single biggest recipient of govt. money is not a bank, but AIG, an insurance company. The common thread of both of these is falsification of information or erroneous assumptions by the ratings agencies. While additional controls such as higher reserves could have reduced this problem, it may not have fully eliminated it. Furthermore, I believe there was no need for greater regulation. There was already a lot of illegal/inconsistent activities that were happening to justify government action to stop it. The Bush administration did nothing and the actions of the Obama administration may actually go towards rewarding some of these people for their reckless actions. 2) The second question is what enabled these loans? Where did all this money come from? A common conclusion made by prominent economists who predicted this crash, such as Roubini, Schiff, Duncan as well as politicians like Ron Paul is that much of it was the result of excessive debt-surplus imbalances between the US and the rest of the world as a result of its trade deficits. I am not too sure how accurate their hypothesis are (though their predictions have been dead on), but if they are correct, it could mean a move away from the US dollar as a world reserve currency as well as a sharp decline in its value. Interested readers should read the books the Dollar Crisis by Richard Duncan (2004) and Crash Proof by Paul Schiff (2007).
