The world is slowly recovering from a major financial meltdown.  People blame the collapse on a number of different things: a bubble of inflated housing prices, relaxed requirements for qualifying for a mortgage, predatory lending practices, greed on the part of mortgage companies and investment banks”¦.  There are certainly many places to point fingers.  Each of these places, however, was doing what seemed logical when looking at a small piece of the puzzle.

As is often the case, we must back up and take a larger systemic view to see further.  Once upon a time, people borrowed money to buy a house, paid it back over time, and ultimately the bank was able to lend that money to someone else.  With the creation of the FNMA (Fannie Mae) in 1938, the income streams of those mortgages being repaid were converted to bonds, so that they could be sold to other investors and the banks to re-lend their money more frequently.  This allowed many more people to afford houses.  In the 1970s, private banks got into the business of creating their own bonds based on debt repayment streams.

Nothing ever stands still, of course.  People continued to look for new wrinkles on these themes to allow them to expand the business, or to increase the profit on the business they had.  Some of these investment vehicles got very complicated, intended only for professional bankers who could understand and evaluate them where the mass public could not.  Or, so went the pitch at the time. Read More