Forum Post: The Credit Crisis - The Ugly and Shocking Truth
Posted 13 years ago on Oct. 13, 2011, 10:35 p.m. EST by TheDuke
(0)
This content is user submitted and not an official statement
Want to understand the breadth and depth of the greed, corruption and negligence that lead to the credit crisis that America is still suffering through? Pick up a copy of "Reckless Endangerment", written by NY Times Pulitzer Prize winning author Gretchen Morgenson. Describes the who, the what and the how of what went wrong.
"Commercial and investment banks used their size and money to..evade any meaningful effort to impose common sense and transparent risk controls in the public interest, known as regulation. Markets are ruled by two emotions: fear and greed, and these institutions got greedy, very greedy. They created financial products that served no real purpose, other than to generate profit for the bank. To keep customers (their only regulator) from understanding the bank’s true intent, they made these products horribly complicated. These products were, in part, simple bets. These bets were layered on top of each other until only the product designers had any hope of realistically estimating what little value actually existed in the products.
Commercial and investment banks came to act as if they understood that giving these products a veneer of social utility would help them hide their true motivation, so they tied a small fraction of these bets, now known as 'derivatives,' to subprime lending and passed the bundle off as the invisible hand of the free market at work.
With the development of toxic (derivative and subprime lending) financial products, the relationship between investment banks and the economy has turned parasitic. A financially parasitic relationship is defined as (modifications from the standard definition noted):
"a type of symbiotic (financial or economic) relationship..in which one, the parasite, benefits from a prolonged, close association with the other, the host (economy or financial institution), which is harmed. In general, parasites are much smaller than their hosts (investment banks, while large, are smaller than the economy as a whole), show a high degree of specialization for their mode of life (investment banks are highly specialized) and reproduce more quickly and in greater numbers than their hosts (check.)
The harm and benefit in (financial or economic) parasitic interactions concern the fitness of the (economy) involved. Parasites reduce host (financial or economic) fitness in many ways, ranging from general or specialized pathology (such as regulatory nullification), impairment of (economic) characteristics, to the modification of host (economy) behaviour. Parasites increase their fitness by exploiting hosts for money (from hedge funds, pension funds, deposits at banks), habitat (location) and (toxic product) dispersal."