Big Fraud Theory
There are a few books or movies that float this Big-Fraud theory (BFT): that the 2008 Financial Crisis was because of massive Fraud.
~ Aristotle Sabouni
Created: 2017-05-15 |
The idea is:
- Massive greed encouraged massive over-leverage, and while everyone (or a few) knew better, they did it because they were dumb, greedy and corrupt.
- They screwed the public knowing that the entire system would collapse, but as long as they were making money and bonus's, they didn't care.
- Greed and over-leveraging caused everything.
The problem is no one credible has really offered this as a "theory", because it's not economics, it's politics. And it doesn't explain anything, if you think it through. Why did fraud cause the markets to seize up, why did TARP loans help? It scapegoats without answers.
The reality is:
- If Fannie/Freddie weren't buying these loans, it wouldn't have been possible: so it's still a failure of Government Sponsored Entity and thus government.
- The leverage was lower in the 2007 than it was in 1998 -- so their increase in leverage was not the trigger (or it would have gone off in 1998).
- Leverage doesn't cause crashes or markets seizing up -- it can only magnify it (or mitigate / hedge against it, if leverage was being used as a hedge). If you owe $5K of $50K on your credit card doesn't cause you to go bankrupt. The underlying problem is cashflow: money in versus money you have to put out.
- If Fraud was the cause, then there was no underlying value to the assets, and the market couldn't recover something that didn't exist (the correction would have to have been permanent). -OR- the fraud was a very minor part of the issue, and once the bigger issues were worked out, the market/housing would rebound (as happened). The facts that the markets recovered so quickly (a few years), shows that most assets did have underlying value, and it wasn't just smoke-and-mirrors (all leverage), and the Big Fraud Theory is largely a lie.
- This theory doesn't explain is why the credit markets seized. Why do people stop loaning, and why did TARP fix it if it was fraud? So it's saying that fraud helped with the bubble, slightly - but everything else in CRAFFT theory was still at play. So it's not an explanation of anything, it's just an excuse to point fingers somewhere else and hate.
- Why didn't government go after them? To believe the Big Fraud Theory, you have to also believe in a huge conspiracy between Government and Wall Street, that bankers and investors have colluded with Congress to deceive the public and that's why no one went to prison in massive investigations of widespread abuse. But CRAFFT theory explains why, much better.
| 🗒️ Note: |
|---|
| No one doubts there were a few unsavory actors, or that Countrywide wasn't and aggressively selling LIAR/NINJA loans (preying on consumers that couldn't afford to pay them back). They were doing exactly what Fannie/Freddie and the CRA had demanded, and paid them for (by buying all those loans up, and putting them into MBS's in the first place).
But these characters weren't the fundamental cause of the crash (all markets cycle), or the credit crunch caused by over-regulation, and it has nothing to do with Glass-Steagall which couldn't have done anything to stop it. So yes, there were over-aggressive players, taking advantage of the Democrat created credit traps -- and they slightly magnified the fall that happened for other reasons. But had they not existed, the crash would have still happened. And those that try to pin THE blame on these guys, are ignorant or dishonest. These were bad actors, but it's like blaming a pickpocket in the back of the plane for 9/11. |
Easier Explanation[edit | edit source]
The far easier explanation is that while this might have happened in small scale (that TV shows and or sensationalist authors exaggerated for self promotion), that it wasn't that widespread, and they were complying with Fannie & Freddies standards (as demonstrated by Fannie/Freddie trafficking in 60-80% of these loans) -- which is how those loans got in the system. Yes, leverage can injected some risk in the system, but the only reason it could have, is because Fannie/Freddie and regulations allowed it. That's not fraud, that's complying with really badly written rules/regulations by a government sponsored entity. Slimy, but legal. (E.g. not Fraud).
Conclusion[edit | edit source]
The fraud could have happened, it could not have happened, but it's an unsavory side note to what caused the majority of the bubble, or the credit markets to seize afterwards (FAS-157), and what TARP and the other loans did to get credit moving again. Thus this BFT is just a political agenda masquerading as an explanation for what happened: but doesn't really explain anything.
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Tags: Economics Crisis Financial crisis of 2007-2008/all
