Fools and the financial crisis

When trying to understand the current financial crisis, ignore greed: that is a given and doesn't change much from one century to another.

The purpose of regulation is to restrain greed, at least partially, while protecting us from excessive folly. This time there was too little regulation and much of what was in place was poorly designed.

The ultimate causes of the financial crisis were the actions of fools:

• individuals and families who bought more home than they could afford.
• the same people who did not have the knowledge or common sense to refuse outrageous and risky mortgage terms.
• the same people who knew that the terms of their mortgages were outrageous and risky but took them anyway believing (hoping?) that they could refinance later.
• the bankers who forgot that cash flow is the source of loan repayment and that the assets which secure loans are merely safety nets to be used in case of default.
• the bankers whose credit standards fell lower than a cheap whore's underwear.
• The Wall street geniuses who created one way bets but forgot that these bets are supposed to make them the winners - always - and never the losers.
• The ratings agencies (Moody's, S&P, Fitch) who tried, and failed, to turn manure into roses and fooled us all for a while.
• All of us who ignored the smell of rotting manure and trusted the ratings agencies for too long.
• The speculators who traded funny paper (their name for it was toxic waste) without understanding what they were doing other than just trying to profit from price changes rather than investing in true value.
• The speculators who bought this toxic waste - securities built on borrowed money - with more borrowed money until the whole system was so fragile that a barely perceptible breeze could, and did, bring down the house of cards.
• And more and more and more...

There is no question that all of these characters should suffer the consequences of their actions. The problem is that inflicting a suitable, and well deserved, level of pain is likely to blow up the rest of the economy.

So, holding out noses, we are forced to bail them out. While we do so, however, we must think about the future and these words written by Herbert Spencer, an English philosopher who lived from 1820 - 1903, are worth considering:

"The ultimate result of shielding men from the effects of folly is to fill the world with fools."