Originally Posted by
50Mules
But if the original distortions were not there (cheap money and government requirements) and the lenders were able to refuse the risky loans up-front, then more regulation and government intrusion would not be needed because the risky loans (at least not to the extent we have today) would not have been made.
I disagree that the loans are the problem. The problem is that the loans were bundled into complex financial instruments that were so complex and opaque that no one could tell how much they were really worth. Also, they were often rated (fraudulently it would seem) as safe loans when in fact they were not.
Banks use complex models to asses their risk. In these models they plugged in loans they knew to be risky the same way they plugged in stocks they knew to be risky. However, they turn out to not be equivalent. On any given day a risky stock is liquid and has a well defined value. The same is not true for these packages of loans and that is half of the reason we are in this mess. The other half is that investment banks were allowed to leverage themselves 40:1.