Part I: How We Got Here:
The Reagan Administration of the United States began a thirty-year-period of deregulation by the legislators in the financial system. Deregulation allowed the financial sector more freedom and less discipline, which provided more opportunity for profit and risk. Reflecting the profit growth resulting from deregulation, investment banks went from small, private firms to public companies. To illustrate the growth of the financial sector beginning in the 1970s and continuing into the early 2000s, consider this - from 1978-2008 the average salary in the United States in every profession other than investment banking rose by 25% and the average salary in investment banking rose by 150%.
Part II: The Bubble (2001-2007):
In early 2000, further reflecting deregulation, a new method of mortgage lending was developed in the financial system that allowed for excessive betting without immediate risk and incentives to sabotage the system for personal profit. The system developed is named the Securitization Food Chain. Simply stated, the Securitization Chain is a system whereby borrowers receive home loans from lenders and the lenders pass these loans across a chain of investment banks, investors, and the insurance company AIG. With each trade, one party earns a profit and the other party earns the loan. The loans were mixed with other types of debt, such as car loans and credit card debt, given a rating, and investors would include these mixes in their funds depending to their rating .Since each party was removed from risk by selling the debt, lenders could extend absurd loans that were highly unlikely to be repaid, rating agencies could grade the absurd debts highly without consequence, and investors could sell the debts with confidence and bet on the debts with insurance from AIG.
The result was the opportunity for virtually anyone in the US to receive a home loan and purchase a home, which sent home prices incredibly... [continues]
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