Do umbrellas cause rain?
Did the ship's band playing “Nearer My God To Thee” cause the Titanic to sink?
Did "liar loans" cause the Global Financial Collapse?
The correct answer to all these quesions is a resounding “No!”
Irresponsible lending & borrowing - "liar loans" - did NOT cause the collapse, though such loans were often criminal and the guilty should be punished.
Meanwhile, blaming liar loans is greatly distracting us from the real cause of the collapse. Mistaking the cause leads to incorrect cures. Bailouts, stimulus packages and improved regulation, necessary or not, don't address the underlying problem, and so can't fix what ails us.
The real problem? Unpayable interest. Total debt, public and private, long ago reached a level requiring unsustainable interest payments. Debt is now about $50 trillion in the US, or about $600,000 per family of four. At 5% interest, $600,000 of debt requires interest payments of $30,000 per year. Is it any wonder we have exceeded the upper limit of sustainable interest payments?
Once total interest payments as a fraction of GDP reach a ceiling beyond which interest payers simply can't pay, it becomes impossible to increase total debt by making responsible loans. It can’t be done. When that point was reached years ago, outstanding loans - total debt - would have stopped increasing if all lenders and borrowers had been prudent and honest. They would have stopped making many new loans and total debt would have stopped increasing. The resultant credit crunch would have produced a financial downturn at that time, with no liar loans ever issued.
Instead, when creditable borrowers could no longer be found, banks kept the game going, making phony profits by issuing loans to borrowers who management knew would never repay them – liar loans. And Wall Street helped forestall the day of reckoning by repackaging those bad loans, often dishhonestly, for resale to greater fools.
Since lenders must have known that after a period of time the loans would fail and the roof would fall in, what were they thinking?
Bank CEO's and their loan officers whispered to one another the most corrosive meme of the new millenium: “IBG, YBG”. “I’ll Be Gone, You’ll Be Gone” – gone with their huge bonuses and posh severance packages intact.
THAT is what induced irresponsible lending. But those liar loans didn’t CAUSE the crash, they just delayed it, forestalling the inevitable collapse for five or six years.
And it isn’t over yet. What’s coming is not just another downturn. Total debt remains at about $50 trillion, so what we are in for is Phase II of the collapse brought on by unsustainable debt. (That's real current total debt, not to be confused with the partly illusory $52 trillion of unfunded future government obligations the deficit hawks keep railing about.)
The true cause of the collapse was missed even by some who correctly warned of Phase I. They mistakenly blamed bad loans for the oncoming crash, rather than total debt reaching heights requiring unsustainable interest payments.
Alas, almost everyone now believes that bad loans caused the crash, and if we just prevent bad loans, we'll prevent another crash. But that won't work, since bad loans did not cause the crash. "It's not what you don't know that gets you into trouble. It's what you know for sure that just aint so."
Indeed, we must prevent miscreants from issuing or taking liar loans, but the crash would have happened even without the bad loans – in fact, it would have happened sooner. To prevent future crashes, we need to turn our attention to how we can reduce our overwhelming total debt, and also to reforming our money and banking system so debt doesn't keep increasing to an unsustainable level.
Our financial system won’t be “fixed” until interest payments are massively reduced. And we must devise a new money and banking system. We need a system that does not need interest payments as a percentage of income to keep increasing forever, an impossibility our present system seems to require.
Comments