What Caused The Financial Collapse?

People have been trying to figure out what led to the recent financial collapse and have come up with a variety of reasons:‚  some say it is due to Americans taking too much risk, or deregulation, or Wall Street’s greed, or the Bush Administration and so on.‚  Most of these people are wrong.

What caused the financial collapse was a combination of a lack of shareholders power due to corrupt boards of directors, partial deregulation, reregulation, “moral hazard” and lazy people.‚  These factors all stem from the government intervening directly into the formerlyy free marketplace.

1. The Board of Directors of a corporation is responsible to ensure that the shareholders interests are looked after.‚  In an ideal world, the Board of Directors of a company would be made up of smart people who’s interests were in line with the shareholders desire to minimize risk and maximize reward.‚  Unfortunately, government regulation of companies has led to Boards of Directors that do not do their due diligence for shareholders. Examples abound: Washington Mutual’s Board should have told the management that they could NOT buid the company around the idea of giving loans to risky people.‚  Instead, they gave the CEO free reign and allowed him to make himself a fortune at the expense of the shareholders.‚  Right now, most major corporations Board of Directors is made up of a slimy group of old boys who pat each other on the back and don’t do any real research on what management is doing.‚  How can we fix the current

corrupt system of Board of Directors:

• Ban the ability of management to recommend a person for the Board of Directors. Come on people, if you let someone pick their own boss, do you think they will pick someone who will make them work hard and make less money?‚  Of course not.‚  The selection of the Board of Directors needs to be entirely independent of the management of the corporation.
• Hold elections to the Board of Directors on a monthly basis, so that if the company is hurting in the marketplace, shareholders can quickly replace the Board with people who will better defend their interests.
• Tie the members of the Board of Directors interests more closely to that of shareholders.‚  You do this by relaxing the requirements for shareholders lawsuits against‚  members of the Board of Directors when things go wrong.‚  Right now, every single member of the Board of Directors for Washington Mutual should lose everything they own to shareholders lawsuits.‚  I also think that there should be a 3 year window after a person quits the Board of Directors in which they can be sued.‚  Alllowing these lawsuits will make the Board of Directors actually do their jobs and make CERTAIN that management is not taking on too much risk.‚  They should also be given stock options, so that if the value of a company goes up, they win big.
• These changes will make members of a Board of Directors act like a person who owns their own business- they will be careful not to take on too much risk so they don’t let their company go bankrupt, but they still will pursue growth in order to maximize the value of their stock options.

2. The “moral hazard” factor is another huge problem that led to America’s current financial problems.‚  The government set a precedent back in the late 70’s and again in the late 80’s of bailing out companies that had financial problems.‚  In 1989, under the first President George Bush, America stepped in and bailed out comapnies in what later became known as the Savings & Loan Crisis.‚  What happened next is obvious: all the other companies saw that if they failed, the government would save them.‚  This led to the massive bubbles of the 90s and early 2000s in stock prices and the housing market… after all, if the companies took too much risk and then failed, the government woud save them, right?‚  Setting this expectation in companies led directly to them allowing their managers to take on ridiculously huge amounts of risk (and take home equally huge paychecks), and when the house of cards fell, everyone looked to the government to save them.‚  This was not a thoughtless occurrence- managers of major banking companies (especially Freddie Mac and Fannie Mae) realized that the government would backstop their losses, so they took no care to minimize risk.‚  Now the taxpayers on the hook for $700 billion.‚  Aren’t you glad that you, your wife and your sons and daughters each now owe $2,000 to pay for the imprudent investing of people who knew they were taking too much risk, but didn’t care because you were going to take the fall for it?

3. Lazy people were another cause of this financial collapse.‚  People across America were lazy: from the people who didn’t bother to learn about the adjustable rate mortgage they were getting to the management who allowed mortgage officers to lend to people with no credit to the shareholders who didn’t hold management accountable for making poor loans to the regulators who were supposedly making sure that things like this didn’t happen (though government regulators are always lazy, we can’t blame them for being what they are).‚  Most of the 10% of Americans who didn’t bother to do their research when getting a home loan are partially at fault, though the sleazy mortgage loan officers who convinced them that the housing market never does anything but go up should be held accountable for their lies too.‚  I personally was smart enough not to buy a home in that market, but now I am going to have to give money at the point of a government gun to the people who were stupid enough not to find out what their adjustable rate mortgage really was all about.‚  I am really pissed about that- if I made the right choices in not getting a mortgage, why do I have to bail out the people who were too lazy to do their research?!?!?!‚  This goes back to the last issues of Moral Hazard- next time around, I’m not going to be so careful because if I’m going to get screwed anyways, I might as well have the benefit of living in a house I own.‚  Do you see the problem now with bailing out all these lazy people who got mortgages they couldn’t afford, and bailing out the shareholderrs of companies that gave them these loans?‚  It’s going to lead to EVERYONE being lazy next time around.

4. What caused people to be so lazy in doing their research into whether or not to get a mortgage or to loan to sketchy people for home loans?‚  It was the fact that the government has partially regulated the industry. Everyone expects that the government will make sure that nothing goes wrong (which of course it didn’t).‚  If there were no regulations from the government, then people would be much more careful about assessing whether or not to do certain things. If there was no government backstop to losses in the banking industry and the government did not have any say in what kind of mortgages were loaned out, people on both sides would be much more diligent about fighting for their own interests and making sure that they weren’t about to get screwed by the other party.‚  Unfortunately, btoth sides of the equation (lenders & borrowers) didn’t do the research they should have done because they assumed the government regulations would protect them.‚  Lesson: Government regulations do NOT protect you, they just make the cost of business much high and make it more difficult to actually figure out what is going on.

So how do we protect against future similar financial collapses?‚  DO NOT BAIL OUT THE COMPANIES THAT SCREWED UP THIS TIME.‚  That will send clearly send a message out to everyone involved that they need to be more diligent about risk management next time.‚  It will provide warning tales of people losing everything so that people will be very careful about whether or not they give out loans to uncreditworthy borrowers or if they take loans they cannot afford.‚  Let people lay in the bed they’ve made and learn their lesson.‚  It may be tough for a couple of years, but the end result will be that the “moral hazard” of giving people the wrong motivations will be removed.‚  We also need to remove the rest of the government regulations, so that there is no illusion that Big Brother will be your safety net.‚  Finally, the system we have in place for Boards of Directors needs to be radically gutted and replaced with a system more friendly for shareholders.

I’d be interested in hearing other people’s perspectives on the matter if they would like to share.‚  Do you agree or disagree with my assertions here?