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Ten Years after the Financial Crisis: Can It Happen Again?

“Bad government drives out good business.”

I added this quote to the latest edition of “The Maxims of Wall Street,” because it applies so appropriately to the cause of the 2008 financial crisis. It was largely government, not private enterprise, that precipitated the unsustainable real estate boom that eventually brought down the monetary system.

Last week’s Toronto MoneyShow took place on the 10th anniversary of the collapse of Lehman Brothers and the financial crisis of 2008. I pointed out that Canada largely avoided the crisis because the banks never relaxed the lending standards like the United States did. There were virtually no subprime lending or so-called “no doc” loans at Canada’s six major banks, all of which survived the financial crisis.

Meanwhile, through a series of misdeeds, the U.S. government encouraged irresponsible mortgage lending. It started with the Community Reinvestment Act (CRA) of 1977 that encouraged banks and mortgage firms to help finance mortgages by low- and moderate-income earners.

In the early 1990s, the CRA was amended to encourage Freddie Mac and Fannie Mae, the two government-sponsored enterprises, to purchase and securitize mortgages of “affordable” housing. Since Freddie Mac and Fannie Mae were quasi-governmental agencies, Standard & Poor’s considered their repackaged mortgages as AAA.

Then there’s the Federal Reserve, the nation’s bank, that artificially lowered interest rates to as low as 1% in 2004 to stimulate the economy and commercial/residential building in particular.

All of these actions sparked an unsustainable boom, as the Austrian economists pointed out, and eventually it all came collapsing down in 2008-09. Can Wall Street and the commercial banking sector also be at fault? In a deregulatory environment, they came up with novel ways to repackage mortgages and sell them abroad.

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