> This financial crisis is significantly worse and we've had virtually no effort put into finding out the root causes.The root causes are quite well known. The primary reasons were:
a. Recent changes to how credit rating agencies (Standard & Poor's, Moody's etc.) calculated ratings - Specifically they started using the stock price to increase credit rating's - this has little to do with actual quality - it was all good when it was a bull market, they were to short sided to see that a sell off would cause the ratings to collapse, which is exactly what happened. This resulted in the initial liquidity crisis.
b. Repealing the Glass-Steagall Act in 1999 that was introduced in 1933 to limit affiliations between commercial banks and security firms. This resulted in excessive leverage being given by banks in 1999-2000 for purchasing investments (also contributed majorly to the greater portion of the bull run and pop of the tech bubble - explained in point d. and e.) which later morphed into sub-prime mortgages being offered in the early 2000's by the people who were not allowed to conduct these activities under Glass-Steagall.
c. The Community Reinvestment Act of 1977 aggravated the situation - but this is overlooked as it leads to political finger pointing. I will skip over it too as it would make me sound too much like the GOP. Though if you do research it, factor the effects of point b. into the analysis.
d. Rapid increase of Fed Rate in the months/year following repealing Glass-Steagall made it too expensive for investors to carry their investment loans and turn a profit. This lead to rapid liquidation of investments and popped the tech bubble. It's really that simple.
e. Following the tech bubble burst the fed rates dropped rapidly which made it easier for people with sub-prime credit ratings to qualify for mortgages. As it dramatically affected qualifying using the Gross Debt Service and Total Debt Service ratios.
f. Once the rates started increasing the only choice was for banks and security firms to structure them into exotic investments i.e. Credit Default Swaps. When ratings dropped due to erroneous credit rating algorithms (point a.) this became a huge issue. (Anyone ever wondered how anyone could have been confused by the risk of something with "Default" in its name?)
g. The most important reason of them all. All of this would have been a blip and not gone out of control at all if it unfolded in 2006-2007 or 2009. That is if it was not an election year with a guaranteed change of a President.
This crisis was caused by bad timing and the shortsightedness of both parties, the law makers, the independent regulators and of the feds. The real systematic risk comes from ending all their careers.
Sure they made a good investment with TARP, but it could have all been avoided if they had not deliberately let Lehman Brothers go bankrupt that resulted in erosion of $10 trillion in market capitalization in a matter of weeks.
I'm not saying the banks are innocent, nor do I accept the "it's all fair in capitalism" argument.
The one thing I haven't been able to wrap my head around is why the lawmakers found it necessary to repeal Glass-Steagall if they did not want financial institutions to conduct the very activity that the Act forbade.