I was listening to an episode of Politics & More podcast from The New Yorker in which Patrick Radden Keefe and Sheelah Kolhatkar discuss the Justice Department’s reluctance and failure to prosecute white collar crime.
At one point in the discussion, they start talking about how the 2008 financial crisis revolved around financial instruments “no one really understood.” I do not want to pick on these two specifically—this is a canard that comes up over and over in press coverage of the financial meltdown and its causes—but I think it is worth pushing back on the notion that no one understands it.
Yes, perhaps the specific tools themselves that were used in any particular malfeasance were tricky and arcane, but the basic concept is not rocket science, and repeatedly insisting that it is does no one any good.
Financial institutions made money from selling debt. You need money, they loan it to you, and then they get someone else to buy that debt from them with the promise that it will be paid back with interest. In normal times, that makes sense, and the financial institutions have an incentive to make sure that you are likely to pay back the money they loan you.
However, as these firms started looking for ways to make more money from this process, and as more of them got in on the action, there was only so much good debt to go around. They had to start finding more debt to sell, so we started seeing loans to people and companies that were not likely to pay back, and a bunch of chicanery and shell-games to try to obscure that fact.
That’s all it is. Not only is all of the it’s-so-complicated hand-waving not really true, it’s a giveaway as to what was actually going on. A bunch of financial institutions tried to make all this stuff deliberately obscure in order to hide and distance themselves from a lot of loans they never should have made.
It is disheartening that, nearly ten years later, we have journalists still trotting out this “It was all very complicated and nobody understands it” junk. It’s not as if there hasn’t been a whole bunch of investigation and explanation of what happened.