Let's turn around and assume pure motives for all the actors in the drama
that has become the US economy, rather than just spout slogans about
Put yourself in a bank's shoes for a second. If I buy a house, and get a
mortgage from you, you effectively have a house. You let me live there
and pay insurance and taxes on it, but the house is pretty much yours.
Now, several hundred of my friends buy houses, and get their mortgage from
you. Now you own several hundred houses, but you're a bank, and have no
use for several hundred houses.
Now the factory that employs 1/2 the workers in your small town comes to
you and says "Our equipment is all falling apart, and we could make more
money and hire more workers if you lend us 200 million dollars to retool
the factory". You'd love to lend them the 200 mil, but all you have is a
bunch of houses. You think "these houses are worth money, but there's no
way to turn those houses into money"
Then along comes Big NY Investment Bank, and they say "We will give you
money for the houses that you have" and it's the perfect solution. You
get money for your houses, which weren't doing that much for you in the
first place, and you can turn around and lend that money to the factory.
The failure was not that they weren't investing money in real stuff, they
were just doing it poorly. Very poorly in fact.
If everybody had been able to pay off their NINA loans, and housing prices
had flattened rather than cratered, then there would have been a slight
contraction, and everybody would continue on.
At their heart, the goals behind CDOs are actually good goals. They take
a pretty solid asset, and let the investment banks turn that asset into a
more liquid form so they can use the asset to lend money to other people
and businesses, so that they can build factories, or hire more people.
But, they failed. The fact that they're still in business is a little
puzzling to me, but they kinda have the entire US economy over a barrel,
so I think some people let this one slide, while they figure out how to
fix the big problem, which is that the US economy has become far too
dependent on credit for day-to-day activities, and if that falls apart,
then a lot of shit goes down with it.
Having said all that, there was a lot of shit that happened, that should
have been regulated, that shouldn't have happened, that was downright
criminal, or should be, but just because the tools didn't work in this one
instance doesn't mean we should throw the tool out. We should just fix
The stock market used to be a much more concrete indicator, back when stocks
paid dividends. Back then, you would buy 200 shares of GE, not so that you
could turn around and sell them for more money later, but because GE would
pay out annual or quarterly dividends to it's stockholders, and if you got
any money on top of that from selling a share, that was a bonus.
Nowadays, you "Buy Low, Sell High". So you buy a share not on the
expectation of a steady return over time, but because you think a share is
under-valued. You're betting on the fact that the company will make more
money next quarter, or next year, than it is now. A year ago, everyone was
pretty sure that the next year (ie: the year that just passed) was going to
be pretty crappy for pretty much every company. They were right. Now it
seems a lot of people are betting that companies are going to make more
money than they did last year (which is actually not that bad a bet,
considering how bad the last year was). So they invest in stocks that they
think will go up.
This has the effect of putting more money into companies so that they can
turn around and expand, and hire more people.