2008 Financial Crisis

How did the crisis come?

Many factors are responsible for the current crisis. The crisis is like a perfect storm – many factors favoring the crisis came together at the same time to make this great crisis inevitable.

1. Irresponsible lending practice of mortgage originators. These companies such as e-Loan tried very hard to generate as many mortgages as they could and then sold them to other companies. This is because they get paid by how much mortgage they generate and it is not related to the quality of the loans. They have little incentive to guard the quality of the loans.
2. Lack of the oversight of the mortgage originators. It is nonsense that we can rely on business to behave ethically automatically without any oversight. A few bad eggs can destroy an entire industry by gaining competitive edge through unethical practice.
3. Irresponsible borrowers. They cheat in their mortgage applications with implicit encouragement or intentional complacence of mortgage originators.
4. Incompetence of rating agencies. The rating agencies almost completely missed the unethical lending that resulted in poor quality loans which received much higher rating than they deserve.
5. Lack of oversight of the rating agencies.
6. Incompetence of mortgage owners such as Fannie Mae (Federal National Mortgage Association (FNMA) and Freddie Mac (Federal Home Loan Mortgage Corporation). They failed to maintain the standard for loan origination and purchased them like blind shopper. The government, especially, Democrats failed in pushing oversight over Fannie Mae and Freddie Mac and in contrast, it pushed them to make more loans for lower income people.
7. Incompetence of mortgage backed security owners. Many financial companies trusted the ratings of the mortgage backed securities and purchased a lot of them believing they are bargains which turned out to be toxic. Those big financial companies are supposed to have adequate staff to detect the trouble and take actions earlier.
8. Astronomic leveraging of financial companies. Once the toxic assets were exposed, their values were marked down dramatically, the heavily leveraged financial companies lost huge amount of money relative to their assets.
9. Lack of regulation of financial companies. If just the leverage level had been regulated, the crisis's scale would have been much smaller.

How to prevent such crisis from happening again.

This is a very easy task. If any one of the above factor is eliminated, such crisis will not happen, at least not at the scale of the current crisis.

How to get out of the crisis.

1. The bubble should be let to burst. There is not reason to artificially boost the housing price to prolong the pain.
2. The money flow should be restored. Some companies should be let bankrupt, remaining companies and new companies should be supported to provide a healthy credit market.
3. Since the crisis has already caused damage to the overall economy. Stimulus should be provided by giving money to needy people so healthy, not excessive consumption can be maintained.
4. This crisis provides an opportunity to start a new green technology oriented economy.