A large slice of the current economic mess can be traced to the financial disaster caused by different kinds of dangerous investment practices on Wall Street. The worst of these is the securitization of various debt obligations including home mortgages.
In a nutshell, driven by the need to make double digit returns, financial propeller-heads purchased shaky debt caused by various bad business decisions, mixed them with a small portion of good debt, then bundled and particalized them throughout the financial system in securities.
The ratings agencies, who had conflicts of interest all over the place, gave these securities top ratings, then banks and investment houses all over the world bought these things, even if they didn’t know what they were. Yep, that sounds dumb.
Just as dumb is what also drove this mess was the really bad decisions made by millions of people. Folks loaded up their credit cards to the max far beyond what they could ever pay at usurious interest rates. They purchased home they couldn’t afford with mortgages that in the end they could never afford. Some of more rational people said were betting that the skyrocketing house prices would just go higher. But I am betting most people just used the extra cash to buy more consumer goods and didn’t think about how two years later they would be underwater.
On top of that, despite the slow decline in general wages, people bought more and more stuff, usually on credit. What were these people thinking?
As looks now, the only way for the U.S. to dig its way out of the mess is to work the problem from both ends – working the banks and getting the mortgage system working again by helping homeowners. It has to be done somehow, but I just can’t get passed bailing out knuckleheads either on Wall Street or in Wal-Mart.