October 15, 2015
By Tim Worstall
Matt Taibbi over in Rolling Stone is getting very hot under the collar about Hillary Clinton’s suggestions for how to deal with Wall Street and the too big to fail problem. That’s Hillary’s plan that I called a very good one just a couple of days back. So, clearly Taibbi and I disagree but the interesting thing is why we disagree. And that’s very clear too: Taibbi thinks that the housing crash and the recession that followed came from corruption. From criminal acts, from people doing wrong. And I don’t: I think it came from people being wrong. And thankfully for the freedom of all us doofuses being wrong is not a criminal act nor do we term it corruption. And the thing is I’ve got good economic research on my side to prove my point.
The root of the 2008 crisis lay in a broad criminal fraud scheme, in which huge masses of home loans were given to people who couldn’t afford them. Those loans in turn were bought back up by giant banks and resold to investors who weren’t told how crappy the merchandise was.
AIG blew up because it insured this fraudulent market. Lehman blew up because it overinvested in it. But it was banks that financed the problem and that were possibly the most depraved actors in the narrative (apart, perhaps, from the Countrywide-style mortgage lenders who were handing loans out to anyone with a pulse).
We know this, among other things, because it was big banks like JPMorgan Chase JPM +1.67% and Citigroup C +3.85% that paid the biggest chunks of the $100 billion in fines Hillary later referenced in the debate. There is a vast record of documentary and witness evidence now attesting to the mass fraud, which was of a type that can and probably will happen again. The policy issue is how to curb the impact of that inevitable next crooked scheme.
And if that is what happened then I’d be joining with Taibbi in calling for the Wall Street Banks to be burnt to the ground, the inhabitants sold into slavery and the ground ploughed with salt. But it isn’t actually what happened.
Oh, sure, there was criminal activity going on: but then when has any part of human life ever been truly free from that? What Taibbi means is that the whole housing boom, to be followed by the inevitable bust and recession, was caused by criminal intent. And that really isn’t what happened.
Read the full article at Forbes.com: Matt Taibbi Is Wrong: The Great Crash And Recession Were Not Caused By Fraud And Corruption