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Comment by wdewind | Hacker News Reader

> but not pass anything onto the consumers, instead using it for more high risk trading

The economy was destroyed by passing it onto the consumers through subprime lending (and a bunch of other things - not trying to assign fault for the subprime crisis here), so high risk trading is not mutually exclusive to passing it onto consumers.

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The economy was destroyed by (a) fraudulently selling subprime mortgages as mostly AAA-rated, and (b) default credit swaps, which totaled a lot more than the mortgages themselves. I don't see your point.

Point a) is actually heavily contended. Fraud is not estimated by any credible economist to have had a major (>5%) impact on the financial crisis. In a market situation there is always a disagreement about whether or not a security is worth what it is worth, hence the sale taking place (both sides think they are getting a good deal). There was disagreement about AAA securities of course, but it's very unclear if that is due to market valuing stuff differently or outright fraud. The contents of the loans were not lied about, whether or not they were AAA was not lied about, whether or not they should've been AAA is up for contention.

I don't see your point with b) at all.

If you're a bank it's not like there are a ton of avenues for you to invest your money, and outside of mortgages there aren't a lot of ways to pass the money onto consumers. So if what you want is the bank to pass its new found money onto consumers that's the avenue you want. Unfortunately the last time we did that a lot of unqualified people got loans. So my point is it's tricky.

The economy was destroyed by inflation of a particular asset class driven in part by irrational beliefs about that asset class (housing) [1], misunderstanding of large scale risk [2], fraud in the market from players on all sides [3], and deployment of financial instruments which pushed a huge amount of money into the market [4].

Many actions made the lending crisis worse, but it would not have come about without the huge pool of money that went looking for debt. [5]

The point is, it's really easy to make things worse rather than better with a huge amount of money.

1. "Homes never lose value" https://books.google.com/books?id=i2FKCAAAQBAJ&lpg=PT115&ots...

2. "Real Estate Risk Model Inadequate" http://pages.stern.nyu.edu/~lpederse/papers/MeasuringSystemi...

3. "Fraud in Real estate Market" http://www.nytimes.com/2015/02/13/upshot/how-mortgage-fraud-...

4. "Novel financial instruments in home lending" https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf Page 127 (156 in pdf)

5. https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf Page xxv (26 in pdf)

and the banks calling subprime AAA+ no risk loans

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