Its the corruption:  of the law, the courts, the lawyers and of course, fractional reserve banking (but that’s always been corrupt and gamed).

Those who make loans in bad faith should be prosecuted extremely harshly, as the root of the ongoing economic crisis in the west is the direct result of that activity.  Clear due diligence rules and common sense must be imposed on lending decisions.

Does that work for Midas?

But that may not stop Midas from trying or, probably more likely, failing to try something that might keep his smelters going and his workers happy at the same time.

When something is never enough, something is never enough.

What, of course, you don’t get, is that their bonuses would have been even higher if the economy hadn’t tanked.

There’s no material basis for that claim. Many of them were awarded bonuses in the tens of millions and were quite shocked when popular opinion got the government to intervene. They believe that they deserve all the money in the world and that anything that gets in the way of their greed is an anomaly. And they’re quite right on the latter part.

It’s hard to see anyone in economics doing anything but work in their own short term interest (mainly because most people can’t see their long term interest).  In London, tube drivers regularly go on strike to increase their already ludicrously inflated salaries – after all, their job largely consists of being alive enough to press a “dead man’s switch”.  A couple of people win; millions lose in inconvenience and higher transport costs; long term, hopefully, someone will have the guts to automate them out of the way.

Their lobbyists and undue influence made sure their companies were bailed out, their bad debts were transferred to the backs of taxpayers, every one of them got record setting bonuses regardless, and not one person brought up on charges
As a career banker, I completely agree that bailing out banks is wrong.  There are – tried and tested – mechanisms to kill a bankrupt bank on Friday, and have the good bits of it operating again on Monday, leaving retail depositors unscathed, and equity and bond holders (sophisticated investors, whose job, on the whole, it is to understand the risks) carrying the can.  The fact that this didn’t happen in the US, UK, Ireland is entirely down to the elected politicians in office at the time – don’t blame the banks. If you believe your country will be better off or taking on the debts a private, risk taking organisation misvalued to the extent that they need a government bailout – well, let’s be frank, you’re an idiot. 

Gee’s, is that the time? I have to wrap up:

Every economic actor is selfish. Unions, capital….

Everyone tries to lobby the political powers – but, ultimately, the politicians are responsible for the decisions they make.

Sigh.

For starters, “no man is a villain in his own eyes”.

Of course Mussolini didn’t consider himself evil. He thought, probably with all sincerity, that he was doing the right thing.  As did Stalin, Hitler, Pol Pot, and the people in Rwanda.

People don’t go out to commit acts they consider evil (YMMV, IANAL, there are nutcases in the world, etc pp. And there may be a few deranged satanists who try to prove me wrong).  People try to do what they think is right.

The problem isn’t getting people to do what they think is right. Even psychopathic murderers don’t do things *they* don’t think are right (IMHO, IANADoctor).

FFS, do you think either of the sides in any war ever fought thought “We are wrong, but let’s have a war anyway”?  

Would deep concern for the stability of the financial system stop anyone try to get a mortgage for their dream home if they can just about wangle it now; you know, you can get the figures worked out with a financial advisor and it looks okay.  What happens if you have kids or one of you gets laid off?  Better not worry about that….

It’s the same rules that apply on Wall Street. If you’re looking to apportion blame, blame the people who over-leveraged themselves as much as the people who lent them the money. No one put a gun to their head and told them to borrow… in fact, if anything, the coercion is worse in Wall Street: Try telling your boss you should get out of the market while all your competitors are long and raking in money. You’ll have a very understanding boss if you last more than a quarter. 
The quote goes – “The market can remain irrational longer than you can stay solvent” - http://quoteinvestigator.com/2011/08/09/remain-solvent/ - the market certainly can stay wrong longer than your boss will put up with you losing money while your competitors are raking it in.

The same applies, of course, to personal finance.  You can apply sound arguments to the overpricing of the housing market all you like, but if your friends are makings lottery money on their leverage property portfolio, even if it’s unrealised, your spouse is only going to listen for a limited time.

But absolutely, no one set out to destroy the economy, any more than heavy metal bands in the 80s (OMG I’m old!!:) encoded suicide messages in their songs to get their fans to kill themselves.

Well, however greedy wall street executives may or may not have been, it wasn’t in their self interest to kill the economy / drive down the market.

Incorrect. Somebody once said that a depression is when the money returns to its rightful owners – the rich.

In a good economy, middle class people invest in stocks and property. When the economy goes bad, rich people can afford to sit it out, while middle class people have to sell at a loss in order to survive.

Economic crises are engineered so that the rich can periodically harvest the resources that have been pumped into the system.

Lewis pointed out the huge cultural divide between quantitative analysts and salesmen. A salesman is, not just on Wall Street but everywhere, someone you can tell “I need this to sell for $x” who will, then, take personal responsibility for convincing himself that the item is *actually worth* $x. One he does that, he can tell customers in all sincerity that the item is worth $x, and selling for $(x-y), which makes it a bargain. And since humans lean hard on rhetorical proof, and since the standard for rhetorical proof is “if the speaker is confident and sincere then the proposition must be true,” it works every time.

A quant is someone who works long hours to try to determine what, exactly, the item is actually worth. This information is of almost no use to the salesman. So the only use a salesman has for a quant is that he will read the quants reports, or listen to the quant’s lectures, letting all of it wash over him until he gets to the one or two sentences that he needs to convince himself that the thing is actually worth $x. Imagine a quant explaining that a certain narrow subset of items is, under narrowly drawn circumstances, worth a range from $z to $x, assuming that the dataset that the calculation was drawn for is correct, and assuming that outside conditions don’t change. What the salesman hears or reads is “Unimportant blah blah blah item blah blah blah is worth blah blah $x blah blah who cares about the rest of this drivel.”

Which is why everybody remembers and villainizes Michael Milken, who corruptly sold junk bonds, not Ivan Boesky, the quantitative analyst who told him that under historical conditions (that no longer applied) junk bonds were under-priced.

*That’s* the role that the copula function played in the subprime mortgage collateralized debt obligation bubble. Buried in it was the couple of out-of-context phrases that the salesmen needed in order to convince themselves that it wasn’t a bubble, that it wasn’t fools overpaying for assets and counting on a greater fool to come along and take it off their hands before the crash.

So, if anything, the crash was caused not so much by any mathematical equation but by one simple nearly-universal legal principle: “caveat emptor” (let the buyer beware). Without a contradictory legal principle of “caveat lector” (let the seller beware), without a legal system that holds sellers liable for selling things that are not suitable to the buyer’s stated needs, all of the incentives will still be in place to reward salesmen who sell things for what they can convince themselves it’s worth, not what things are actually worth. You can’t make the salesman listen to the quantitative analyst’s quibbles and qualifiers as long as he’s not going to be the one taking the loss, or even the blame, if what he says turns out not to be true.

Another aspect towards returning to how banks are supposed to be is taking some personal responsibility.  How many people would walk into a place that looks like a tiny convenience store on a typical city block, with one poorly-dressed clerk, but they have a piece of cardboard from a soda flat written in marker on which it says “& Bank” taped to theTony’s Convenience Store sign, and then they just give Tony $10k to deposit?  Nobody does that.  Tony might not even have a good safe.

But they will walk into a brick building with glass doors and marble tile and three ladies in pantsuits behind a counter and give them their money eagerly, when by midnight it might be invested in some mortgage-backed derivative securities or on a high-frequency trading account.

The real trouble is that the FDIC will guarantee the deposits of the latter people so they don’t care and the banks don’t really have to worry about the repercussions of failing as far as customer service goes.  This is how we’ve currently aligned incentives.

Really, what we should be interested in is having a legitimate insurance company backing those deposits and that insurance company auditing the bank, profiling its investment strategies for risk, and making those risk profiles known to us (like bragging about their risk rating on a radio ad).

But that takes some trivial level of thought which we want to avoid, so we let the government “handle it” and tune in for the next episode of “Banks Gone Wild” on the nightly news, which never mentions that WE are going to be paying for all those bailouts for the next hundred years in the way of impossibly high taxation and a low standard of living.  “Maybe we should have paid attention” might be the new catch-phrase in another few years.

Well, however greedy wall street executives may or may not have been, it wasn’t in their self interest to kill the economy / drive down the market.

It wasn’t in the collective self-interest, but the individual decisions that brought down the economy were absolutely made in the individual self-interests of those involved. The system was set up in a way that gambling with other people’s money was all reward and virtually no risk. Otherwise those executives wouldn’t have been getting “bonuses” after the house of cards came tumbling down.

Ahh… “rational self interest” such a charming notion…..

It’s hard to see elite business doing anything else but deliberately extracting wealth because they knew/know they can get away with it. And how again did this hurt them? Their lobbyists and undue influence made sure their companies were bailed out, their bad debts were transferred to the backs of taxpayers, every one of them got record setting bonuses regardless, and not one person brought up on charges.

Yeah, “cartoonish”… It certainly is…..