Origins of the current financial mess

Watch it on Academic Earth

Most of the readers here will probably diagree with the narrative / ideology of the speaker but the talk itself is interesting, especially since it was given contemporaneously, Jan 2009 I think. (Be warned, the facial tic is disturbing) Causes according to Dr. Blinder:

Risky lending - based on abnormally low default rates over the past 5 to 6 years (from 2003 to 2009). This was backed up by mathematical models that didn't look back far enough also.

Housing bubble - Irrepsonsible mortgage lending and irresponsible taking of mortgages by consumers. Refinancing ponzi scheme, liar loans, no-doc loans, ninja loans (no income no job or assets). Brokers made risky loans because they would only hold the loans for a short time and then they would be passed on so any defaults would be someonelse's problem. Blinder believes that mortgages should be federally regulated, he also believes there should be a suitability standard, and that brokers should have to hold some percentage of loans they originate to maturity.

Regulatory failure - specifically failure to rein in subprime lending.

Mortgage backed securities - as noted above the mortgages were bad so the securities were bad. When the defaults started the banks held huge amounts of debt. This was caused by bad risk management practices including poor diversification of capital classes (up to 80% in mortgage backed securities).

Rating agencies - didn't do their due diligence. Conflicts of interest exist because the agencies are paid by the bond issuer. He also advocates a bit of Caveat Emptor in that the lage firms should do some of their own investigation and rating.

Derivatives based on mortgage backed securities - unregulated and excessively leveraged. Very short term financing which led to a lack of liquidity when defaults started. (AIG) An attempt was made to regulate these derivatives and it failed. I personally don't know if this would have made a difference but maybe enforcing some liquidity requirements and limiting leverage would have.

George Bush - Of course it had to be George Bush's fault. My memory of events is different that Dr. Blinder's but I am not the one giving the lecture.

The Lehman Brothers failure - destroyed confidence in the financial system.

During the question and answer session it becomes very clear that Blinder was not a fan of TARP or the auto industry bailout.