Subprime crises (Part 2)

To-day I received the following question from a highly appreciated business friend :
May I ask a collateral question ?

Would you agree that the current finance and banking "crisis" is a bankrobbery with the implicit support of state supervision agencies in the major developed states and has been possbile because the imperfection in the crediting system has become visible due to the increased globalisation of the post 1973 system of organisation which put pressure on the banks to have continued to survive as long as they did by acting immorally in awarding subprime credits and selling derivatives which in ethical condition were in fact not sellable ?

I think it is worth while to provide you as readers also with our answer :
I like to break down your question into smaller pieces, however I do realize they are interconnected.

So are my best - belowmentioned - guesses in order to try to find an answer to your complicated question.

1) The cause
Failure 1)
As the direct cause I see the low interest politics of Greenspan with unsufficient counterweight in the White House.

This resulted into two major effects :
I) E.g. Mortgages could be obtained for unstable income-groups - "secured" by their ownership of houses

II) Investors
(1) bankers
(2) private equity
(3) individuals
were looking for improved yields, since rate of interest were too low.

In relation to the group II(3) - the individuals:
You could divide this spectrum into : the poor people and the rich people
3a) The poor people : they went greedy obtaining a house they could not afford in principle.
3b) The rich people : they went greedy trying to obtain more yield than the normal rates of interest with some surplus since the P/E of shares was too high - alternatives should be found.

Failure 2) Lenders took the mortgage property value as granted and provided loans up to 125%, however did not look into the future cash-flow of the borrower
Failure 3) Unsufficient risk management within the Lenders to determine the system Failure 2
Failure 4) Unsufficient governmental supervision on the quality of risk management of the Lenders Failure 3

In relation to the group II(2) : private equity - driven by the desire of the people from the spectrum 3b (the rich poeople)
Again helped by the low Greenspan rates of interest their playing field really was unlimited.
Failure 5) Lenders took the underlying property value (again) as granted and were prepared to provide loans upto more than 90%, backed with an appropriate credit rating
Failure 6) Unsufficient risk management within the Lenders to determine the system Failure 5
Failure 7) Unsufficient governmental supervision on the quality of risk management of the Lenders Failure 6

In relation to group II(1) : bankers - driven by their personal desire, bonussystem, etc. they were greedy - reaching for their goals

Assisted by the system risks of Basel II (whereas Bankers now themselves could determine the solvency-grade for debtors reaching from 1,6 tot 4 - 8 and 12% of solvency instead of 8% of Solvency) and covering their asses with a rating from a rating-agency they were able to create monetary extra money.

E.g. coming from 8% solvency towards 1,6% it means that 6,4% more money can be created than in principle was available according to the real cash-flow.
Failure 8) Unsufficient knowledge with bankers in respect to the consequences of Basel II in monetary aspects of solvency-ratio's
Failure 9) Unsufficient governmental supervision on the quality of risk management towards the Bankers' toys viz. Basel II
Failure 10) Inadequate ratingagencies providing the wrong ratings not able to determine the underlying risks
Failure 11) Unsufficient knowledge with government in respect to the risks of inadequate ratings

The results are as follows :
The USA created (grosso modo) a monetary bubble of maximum ca. 6,4% of their GNP which has to be earned by new growth of the GNP.
The recession - in my opinion - willl therefor last till the moment the USA has reached that growth of 6,4% measured from the start

Since this basic principle of extra monetary money was created by other banks in other countries as well, this crisis now has a global scale.
Basic lesson is that the monetary aspects of creating money has to be in the hands of the National Bank such as the ECB and not to local bankers, regardless their sizes.

I hope that this answer is a liitle to your comfort.