In the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. The new system was much bigger than the old regime: On the eve of the current crisis, finance and insurance accounted for 8 percent of G.D.P., more than twice their share in the 1960s. By early last year, the Dow contained five financial companies — giants like A.I.G., Citigroup and Bank of America.
And finance became anything but boring. It attracted many of our sharpest minds and made a select few immensely rich.
Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Sub-prime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.
But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption.
Attention Ditto Heads: This is a serious question, so please treat it as such. I recognize that Lush Rimbaugh has been trashing Timothy Geithner, but Lush is negative for negative sake, not because he wants to make America better.
Attention: Obamabots, Barack Obama has shown that his Wall Street buddies are more important than America’s best interest. If that weren’t true, Barack Obama would not have waited almost 3 months: to propose regulating credit default swaps that were specifically unregulated by Phil Gramm and the Republican Cabal of Reagan Devolutionists; to reinstate the 70 year old SEC Uptick Rule requiring shortseller stock market manipulators to sell at higher stock prices; to return the power to bankruptcy court judges to renegotiate first mortgages and cram down sub-prime mortgages and underwater mortgages for all honest Americans.