From my perspective, the experts analyzing the recent worldwide finance problems missed one fundamental change that underlies the problem - the retirement of Alan Greenspan as chairman of the Federal Reserve and his replacement by Ben Bernacke. Both men are esteemed members of a select community of experts in finance. The problem is that they hold divergent philosophies that crashed like a train wreck.
Greenspan held to the belief that through homeownership, Americans would benefit from increased wealth as the value of their homes rose. To this philosophy, Greenspan emphasized policy that encouraged homeownership - keep mortgage rates low. The result of this policy was ever increasing values of homes, exactly what Greenspan envisioned. Americans could now borrow on this equity increase to fund other purchases that would keep the other parts of the economy growing.
The unfortunate result was twofold. Investors saw an unlimited rise in housing values and paid prices for units that lacked economic reality, especially in the fastest growing areas of the country. Banks funded these investors (and homebuyers) at 100 percent of purchase price, also figuring that the balloon would continue to expand.
Bernacke took his role of chairman in the traditional manner and began to rein in credit, leading to a classical liquidity crisis - that is, the banks did not have funds to lend to continue to feed the home-buying frenzy. Mortgage rates soared. Pop went the balloon.
Some would say the result was inevitable. I say it was avoidable. The first and most important problem is that banks (they make money by lending money and selling the loans to third parties) should have been limited in making loans to investors who put little, if any, of their own funds in their ventures. The second is a more careful scrutiny of the creditworthiness of true homebuyers. Letting borrowers state an income without the lender checking essentially put loan recovery solely on the value of the real property being purchased.
Finally, I would say that the Federal Reserve must be more careful in understanding how its policy works and not doing right turns when the head changes.
Murray Tucker, Ph.D.