I wonder how Smith would apply his theories in addressing this latest debacle (from 2008 on). In actuality, there are elements of Smith’s argument that are applicable, especially when it comes to limiting excessive government intrusion into the markets. Again, I do not intend to debate the merits of Smith’s theories, or any other philosopher’s tenets, for that matter.
Rather, my point is that every link in the chain that was wrapped around the throat of the global economy during the subprime-lending debacle and subsequent banking crisis was not solely the product of short-sighted economic policies.
It was driven by human fallacy and the psychology of greed. Subprime loans were extended to borrowers who made irresponsible decisions, and did not have the financial wherewithal to purchase new homes and automobiles. Lenders dangled enticing incentives to lure unsuspecting borrowers, in a mad dash to drive up the volume of loan originations which paid hefty commissions.
Brokers hid the true performance of these bad loans in collateralized pools that were supposed to aggregate the risk, yet were often not properly valued.
Bankers created an increasing array of financial instruments to derive even more value from the trading of these pools of bad loans, including CDS contracts.
Government regulators either did not understand, or were irresponsible, in oversight and did not adequately protect the investing public.
Investors sank fortunes into the market, thus enabling a dangerous herd mentality.