What Really Triggered the Financial Crisis? by Mike Whitney

[Crewleader]

April 27, 2010

The Shadow Banking System Blew Up

What Really Triggered the Financial Crisis?

By MIKE WHITNEY

Most people still don't know what caused the financial crisis. They know it had something to do with subprime mortgages and Lehman Bros, but beyond that, it gets rather hazy. Unfortunately, Congress appears to be in the dark too, which is why their attempt to regulate the system is bound to fail and pave the way for another crisis in the next few years.

The real source of the the last crisis is a design-flaw in the architecture of the modern banking system. This sounds more complicated than it really is.

You see, credit, which used to be strictly regulated--since it allows banks to create money out of thin air--has become a franchise which is shunted off to hedge funds, insurance companies, pension funds and other so-called shadow banks which are able to take advantage of loopholes in the system and create gigantic amounts leverage without any regulatory supervision.

At one time, when a bank made a loan, they made sure that the applicant had a job, steady income, collateral, and a good credit history. That's because the banks knew they would be holding the loans to maturity and any loss on the loan would impact their profitability. That's the only way that it's safe to allow private industry (aka--the bank) to create credit. The financial crisis proves that unregulated credit-generation is every bit as lethal as a neutron bomb, which kills everyone in the vicinity, but leaves the buildings still standing. The credit-mechanism cannot be handed over to unregulated speculators without putting the entire economy at risk.

http://www.counterpunch.org/whitney04272010.html

[Turbineguy]

1. What triggered it

was the discovery and putting into practice strategies that ensure one could make big money from doing financially harmful things. People made big money writing liar loans, then others made money betting they would default.

[bemildred]

2. Fraud. nt