Financial crisis had clear causes

Apologists for the financial meltdown that threw the country and the rest of the world into the deepest recession since World War II now say it was all the fault of the computer model they were using to measure risk.
To remedy that, they have squads of wizards hard at work cobbling together new formulas that will take human behavior into consideration to better understand why, in a matter of days, traders stopped buying and selling so prices for securities couldn’t be established and the credit market froze.
Hindsight should be doing a better job for these folks: The house of cards collapsed because it was a house of cards.
Investment banks made bonds out of a collection of subprime mortgages. A subprime mortgage, remember, is one that should not have been made. Buyers bought homes they couldn’t afford because they were given the money by scam artists; crooks who got rich on commissions from banks that got rich (temporarily) using the bonds as capital, which allowed them to make other risky loans.
There isn’t any need to go through the rest of the sorry history. Credit seized because far too much of it had been issued with far too little real collateral.
As is so often the case, the victims of the implosion of Wall Street most to be pitied were the little guys at the bottom of the heap who lost — and are still losing — their homes to foreclosure and now find themselves without savings, without a house and, in millions of cases, without jobs.
Those bankers, in the meantime, are back in the big bucks, fighting with all of their might against every effort by Congress to put a cap on their salaries and bonuses.

ALL THE SAME, it’s a good idea to construct a new risk evaluation model which factors in human behavior, aka common sense.
Those who make credit decisions for the nation and the world should know that once the investing public comes to understand that money is being loaned on a huge scale without the realistic expectation that it will be repaid, they will “panic” — that is, they will take what chips they have left out of the game before they lose them all.
The lesson to be learned is not that computer models were flawed, but that no one was watching the store.

— Emerson Lynn, jr.