[ExI] Was it just greed?

Dan dan_ust at yahoo.com
Thu Jun 4 13:26:12 UTC 2009

--- On Thu, 6/4/09, Stathis Papaioannou <stathisp at gmail.com> wrote:
> 2009/6/4 Dan <dan_ust at yahoo.com>:
>> But in this case, how would anyone make much money off
>> that -- once market interest rates rose and prices fell?
>> We are seeing a lot of these lenders go out of business,
>> so I don't think "Choctaw Bingo" exactly applies across the
>> board.
>> Also, that kind of behavior would happen all the time.
>> One would expect this kind of cheating to be at a, more or
>> less, constant level.  One needs to explain why it was
>> worse recently -- which is why a pure* greed explanation
>> (and this is just a species of that sort of explanation)
>> fails.  This is where Austrian Business Cycle Theory fares
>> much better: it explains specifically why people would take
>> more such risks during the boom.
> A new factor was the existence of Credit Default Swaps, by
> which
> financial institutions believed they could insure against
> losses. It
> didn't work out that way.

There are always new factors.  In this case, some relatively new financial instruments (IIRC, these swaps came into being in the late 1990s) did play a role.  This doesn't negate the Austrian Business Cycle Theory (ABCT) explanation; it merely explains the path some of the inflation took.  Also, sans inflation, these swaps wouldn't have had much of an impact -- not on the whole economy; there would've been no new money to flow into them in the first place and they would've had to compete with other instruments for funds.  (Also, without the moral hazard created by the "Greenspan put," one would expect that new financial instruments would be viewed with skepticism; a climate of "the Fed is here to CYA" -- which still exists -- tends to increasing risk-taking, no?)




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