There was a vast pool of money looking for some better representation than government notes. This created a market for people to connect the money to products. Since the buyer was only looking for a return on investment rather than directly used products and services, the ‘connecting’ people had a lot of room for creative use of the money. Predicting the financial crisis: a few who saw it coming, and why takes note of an article by Michael Lewis on the roots of the financial crisis.
There’s apparently a very powerful desire to believe in a pleasant fable in which home prices continue to rise forever, and where heads of huge companies and the people they employ actually know—and care—what they are doing, and what the larger consequences of their actions might be.
A while back I called the subprime mortgage market and its derivatives and tranchings an attempt at alchemy, that futile quest to turn base metals into gold. Unlike actual alchemy, this effort seemed to work—for a while. But now it’s turned to dross.
When people are paid to create transactions, their interest is in selling transactions. In this case, the pool of money was a pressure and some creative product packaging tended to obfuscate the actual risks involved. That creativity when coupled with government policies for social initiatives were major factors in build a house of cards out of the pool of money.
What was the wind that attacked that house of cards? It may have come from the summer price of oil and a housing market that was a bubble ready to burst. Then there was this election campaign thing …
Many factors, many stimulants, many connections, and many misperceptions – that is why there is no simple fix.