Loony capitalism

Washington Monthly, Nov, 2007 by Charles Peters

There was a nutty "markets are always better" and "regulation is always bad" philosophy that came in under Ronald Reagan and opened the door for the bad guys to rush in and tempt good guys to lose their integrity in their haste to get rich. What happened in the sub-prime mortgage market illustrates much of what has gone wrong. A new financial instrument was created. It bundled mortgages bought from the original lender and then sold the bundle to a hedge fund or some other financial institution that had no relation to the original borrower.

This meant that the original lender was tempted to make loans on any terms, however unsound or misleading, that would attract borrowers, because the lender would be paid off by the bundler and did not have to worry about collecting the loan. The institution that bought the bundle did so with assurances from rating firms who wanted the bundlers' business that the loans were solid. But when the institution found out that some of the loans were shaky, they had no relationship with the borrower to discover just how shaky. Thus, they got nervous, as did the rest of the financial system to which they were linked.