The credit crisis just keeps getting worse. Lehman Brothers (which predates the Civil War and survived the Great Depression) just filed the largest bankruptcy in American history. Yesterday was the worst day on Wall Street in 7 years, with the Dow dropping over 500 points. According to NBC Nightly News, “This is certainly the largest financial disaster in decades in this country, and perhaps the end of an era in American business.” And many believe that the worst isn’t over.
This whole problem stemmed from one thing: Bad mortgage loans. Ten years ago the American home seemed like such a sure bet that a huge portion of the global financial system ended up owning a piece of it. Unfortunately, the mortgages (and mortgage deriviatives) these financial institutions were gorging themselves on were bad. And to make matters worse, banks bought these bad loans on credit, creating a massive house of cards. Once these loans started defaulting and housing values dropped, the house of cards began to crumble. Now guess who will end up picking up the tab?
My question is this: Why isn’t anyone talking about the government’s role in all of this?
Isn’t it the role of government regulators to identify these problems before they happen? The practices that were used by mortgage lenders were so obviously bad — surely some economist at the Fed noticed. Why didn’t they take action to avoid this?