It interests me looking at the threads here. All the analysis of the problems are related to central banks and money supply, which some of you think is private banks controlled others think public controlled CB. The thing that actually failed in the first place that created this situation was the front line banking model the model of how to determine whether someone was capable of making repayments on debt, the amount they could borrow and what the risk premium in this case the interest rate should be. No body has addressed this problem on a public or private level. When the credit crunch hit the debt was not purchased in derivatives to the same degree preventing the lending function, at least at the previous volume. The actual model of front line banking was not changed to address this problem it was simply slowed due to the lack of interest to hold the debt. This has slowed the lending mechanism and slowed economic recovery. Until the front line banking model is reflective of the risk that lenders face the volume of lending will not recover naturally. In that credit to small businesses and high risk individuals is obstructed by the fear of loss without the return, the only route is the supplements of governments, which is not perpetual. Higher interest rates will entice people to lend. However this will prevent borrowing as a result of higher costs. If these problems could be resolved that would enable economic recovery.
This might sound too damn simplistic, but the root of all evil with our economy for the last 100 years has been the slow reaction to the bubble by our beloved Federal Reserve kingpins. Well, Greenspan is definitely the main cause of the Subprime mess that triggered the credit crunch.
I am afraid attempting to find one cause for a complicated problem is the problem. Greenspan should have raised rates, underwriting should have been stricter, there should have been no pressure for what I call affirmative action loans, and the CDS should be put on an exchange immediately. Its a cumulative effect. I have probably left out a few other issues, maybe someone can add them. Something to consider. Ireland and Spain had RE collapses and to my knowledge they didn't have subprime lending.
Nah - it was too much loose money from low Fed rates. The housing bubble from bad loans was the symptom, not the cause. With all that cheap money sloshing around, something was going to bubble. It just happened to be housing this time (instead of internet stocks). Mr Bubblespan did have an opportunity to control it though when the FBI reported an epidemic of mortgage fraud in 2004, but he said "WTF - I'm the Maestro!"
The horrendous distortions of the economy in the form of deregulation and forcing banks to lend to people that cannot repay are more along the lines of something we can do something about.. Greenspan claims that he thought that people would regulate their own behavior, which seems ridiculous really... government has to regulate behavior, that is their primary role!!
Well, there is no such thing as good debt or bad debt. All debt is a burden until it is repaid with as much interest as the borrower can stand. So, it's to the banks' advantage to pile as much debt as possible onto individuals/gov'ts/corporations . Especially since they knew they would be bailed out directly by TARP and/or indirectly by the Fed's buying toxic assets at face value. And since no western Gov't will probably ever run a balanced budget again, the banks have a guaranteed method of profit growth. The big question is how much longer can the west drag this out without taking drastic measures before the system starts to collapse? This will be obvious when "flash crashes" of several percent or more become a weekly event. Months, weeks, days...?