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> "If in the end it was the home owners who shouldn't have bought homes that caused the collapse"

The problem with placing the blame on the homeowners is that the state stepped in and saved some of the parties in question from counterparty risk. Yes, you should not take out a mortgage that's too big. But if you default the bank should also take a loss for doing such a bad job in giving you a loan.

AIG provided hedges against these bad loans. That, obviously, was a bad business move and they went belly up. But the intermediate banks never felt this counterparty risk because AIG was bailed out by the state.

The moral hazard is that the banks made bad loans and when the homeowners defaulted made large amounts on the hedges (sometimes more than the original capital of the loan). That would never have been possible without the taxpayer bailout, hence the anger.

It's was a fantastic PR move by several banks to publicly parade when they had paid off the bailout loans. The truth seems to be that it was peanuts compared to the money that flowed out from AIG through the hedges made.

"That would never have been possible without the taxpayer bailout, hence the anger."

What I still don't get: wouldn't it make more sense to direct the anger at the bailout, that is, the government? The same guys who are now calling for regulations? Why trust them now?

With respect to blaming homeowners, I was referring to the article which blamed lenders to homeowners.

Wasn't losing the savings of half a country the consequence of not doing that? See Great Depression, Argentina's corralito, etc.

A good point which just happens to be one of the points of the Tea Party movement.

Anger at those who borrowed more than they should have is inchoate and can stay that way since it brings its own punishments, anger at those making the bailouts is focused and effective. E.g. voting for the TARP was one of many reasons Utah Senator Bennett lost his bid for nomination.

The AIG story is not in the least clear, due to:

The inexplicably generous benefits to the counterparties.

The more than rumors that AIG's insurance units' investments were of low grade (i.e. a lot of this toxic waste).

The fact that the government (NY's, i.e. Elliot Spizer) trashed AIG's corporate governance a few years before the denouncement and basically made their leaders' job pleasing it vs. doing the right thing.

This one example of AIG is not one I'm comfortable as of yet using for an object lesson.

As for the pay offs/backs, it was a matter of public knowledge/record that some of the firms that were made to take bailout loans ("you will not be allowed to leave this meeting until you sign") didn't need them ... the whole point was that the Treasury wasn't signaling to the market which companies were at death's door (e.g. three time loser Citibank) and which were OK (e.g. Goldman).

> it was the home owners who shouldn't have bought homes that caused the collapse

That's peachy. If those homes shouldn't have been bought, why were banks making the loans in the first place? Because they could immediately transfer the risk to other parties, who didn't know they were shoddy loans.

In a market with information asymmetry, that clears over years rather than days or weeks, I do find it quite distasteful to blame the home buyer.

Yes, they shouldn't have taken the loan out in the first place, but beseeching the population to be more "responsible" in the future (for some value of responsibility), as if this will somehow avoid disaster in the face of structural hazards, is either naive or disingenuous (pick one).

"If those homes shouldn't have been bought, why were banks making the loans in the first place?"

Because if they didn't, the Federal Government came down upon them like a ton of bricks.

This was one grand and mostly bipartisan experiment, the difference between the two parties being one of degree, e.g. "ownership society" (G. W. Bush) vs. "let's roll the dice" (Barney Frank). ADDED: A decades long experiment, going back to the New Deal when e.g. Fannie Mae was created in 1938.

To make it work, they obviously had to pump the system so that banks didn't hold onto the paper but could write new loans as they sold off the old ones. This had the not necessarily intended effect of separating the underwriting from the risk it created.

Getting back to the point about buyers, unless you're a libertarian raw of tooth and claw and e.g. want to let anyone agree to any sort of loan at any terms (e.g. payday loans as a milder example), yes, a population in general does need to be forced to be responsible. All the more so when from top to bottom (e.g. White House and the Congress down to loan originators) the establishment has ... established so many structural hazards.

Please don't misquote me - my sentence started with an "if", and I was referring to the theory put forward in the article (Hence the "if" - meaning "if we assume the theory put forward in the article is true").

Nevertheless, as you say, it is group behavior and greed - I don't think any kind of regulation can prevent that. People will just find other ways to screw up. And I think it IS fair to blame the greedy people at least a little bit.

As for banks having no risks, I don't really buy it. Could they count on the bailouts?

Of course a movie titled "Inside Job" is going to be biased. That doesn't mean that the movie is wrong, though.

Some of your comments strike me as a little naive and ill informed.

For starters, it wasn't just the housing bubble the caused the collapse.

Secondly, it wasn't long ago that banks wouldn't lend to people who didn't have a stable income. Patronizing? Maybe. But did you know that they specifically targeted loans at people without an income? No bank can profitably loan to people like that! In Germany the banks are far more regulated; there really is no comparison.

Telling people they can afford something when they can't isn't fraud. Never has been, either.

I agree that better education is a step in the right direction, but no education is going to compensate for group behavior. When you earn roughly as much as your friends do and they all buy big houses in good neighborhoods (that they obviously can't afford) then you're going to want a similar house too. It's human nature. If nobody in the group could get a big mortgage the problem would disappear.

Regulation has kept banks from acting irresponsibly in the past and regulation can keep banks from acting irresponsibly in the future.

"In Germany the banks are far more regulated"

That may be true but it hasn't kept them out of serious trouble or from requiring bailouts. As I recall, the major trouble they avoided was direct risk from German home buyers, but e.g. commercial real estate has been another matter.

I'm not familiar with this movie and only skimmed the fine article, but it's worth pointing out the systemic global nature of this bubble and crash. The US wasn't the only place to have a residential housing bubble or solvency and liquidity bank crises.

I think we pretty much have to acknowledge that there was a global credit bubble that expressed itself in different ways in different places (e.g. the Japanese didn't really exit their lost decade) and work backwards from that.

Actually the German banks got into trouble mostly because they bought big time into the American subprime mortgage and CDS card house. Because those things promised low risks and high profits. Pressure from investors and politicians (who loved the idea of their regional banks becoming big players in the global market) did the rest.

"For starters, it wasn't just the housing bubble the caused the collapse."

I was referring to the theory put forward in the article.

"Telling people they can afford something when they can't isn't fraud. Never has been, either."

But saying something has an AAA rating when it really is junk might be fraud?

I still don't get how a bank can be irresponsible. At worst, they should just go broke. If they decide to give a loan to somebody with no income, it is their risk. If that person can't pay, the bank loses the loan. If they manage to insure it (in a legal way), OK.

Outlawing prop-trading is probably a good idea. It will reduce conflicts of interest and prevent firms from trading ahead of their clients. I do think that these investment banks get a bad rap for just making the markets.

Personally I think that any regulation that pretends to know better what is good for people than the people themselves is flawed on principle.

That's the whole problem - banks, lenders, lendees, BP - they don't know what's best for themselves. And because our system has been specifically deregulated, these schemers were able to completely game the system.