Professional Analysis of WHAT WENT WRONG

Hopefully by the time this is published, the “bailout” plan will have been approved by Congress and signed by the President. We can hope that Washington works, though we have our doubts.

Credit Crunch

Nevertheless, a step to take after the financial system stabilizes is to take a look back and see where things went wrong. I cannot even begin to start. It’s too complex, lots of things went haywire, and greed surely factored into the equation. We can simplify, reduce mistakes and risk, but greed will never expire. So, we’ll have to put up new, better rules that protect people from their own greed (all parties involved exhibited some greed).

The article below doesn’t really address the genesis of all this. Rather, it paints the picture of why and how several large financial institutions failed in a matter of days (Fannie Mae and Freddie Mac, AIG, and Lehman. You can now add Washington Mutual to the list — same problems).

It’s interesting to see how things transpired. Suffice it to say that cash flow and loss of financing caused these big and established companies major issues. Issues that they couldn’t solve on their own.

In the grander scheme, it might very well have been that the real estate euphoria finally wore off. The leverage that we all (homeowners, banks, mortgage houses, investment banks, hedge funds, and others) enjoyed led to our ultimate demise.

Diamond and Kashyap on the Recent Financial Upheavals – Freakonomics – Opinion – New York Times Blog

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