By Stephen Moore
No event of the last 30 years was more financially traumatizing than the mortgage meltdown of 2007-08. Some 7 million Americans lost their jobs, 6 million lost their homes, and countless millions more lost their life savings.
One lesson of the real estate crash is that markets don’t always work perfectly, far from it — but they work better than any alternative. It’s critically important that investors, bankers, taxpayers and politicians learn why things went haywire so they don’t happen again.
The new hit movie “The Big Short,” based on Michael Lewis’ bestselling book, is an entertaining and suspenseful reenactment of all the breakdowns in the banking and housing industries that caused the financial world to go collectively mad and the many unsavory characters.
It brings back bad memories of how symbiotic relationships among auditors, credit rating agencies, banks and insurance companies created dastardly conflicts of interest.
I’ve never understood why auditors and credit rating agencies work for the financial institutions, not the investors. It’s like the old joke about the CEO who asks his accountant: “What is two plus two?” The accountant looks around and whispers, “What do you want it to be?”
McDonald’s workers were getting half million-dollar mortgages. One Miami stripper owned five houses and had five mortgages. The credit agencies were giving triple-A bond ratings to junk mortgage-backed securities without even examining the unpayable low down payment “NINJA” (no income, no job) loans in the portfolios. These ratings were handed out right up to the very eve of the crash.
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To learn more about Stephen Moore, visit SupplySideEconomist.com.
Photo Credit: David Shankbone