There are four basic reasons the financial collapse could have been foreseen and could have been prevented

A)The housing market bubble came about for understandable reasons and B) was relatively easy to avoid.



Even after the market collapse, C) a financial meltdown was also understandable and D) could have been avoided.



Let's see how

A) Could the market bubble have been foreseen? Yes and here is why:

- Housing prices were obviously inflated when mortgage costs doubled as a percent of income, that was a clear indication that the prices were unsustainable

- When the business of writing mortgages, holding mortgages was broken down among three separate groups (mortgage brokers, CDO Bond holders, and mortgage servicers) the incentives for fraud and financial mismanagement became unstoppable. Mortgage brokers were incented to write large volumes of high cost low quality loans and had no incentive to care if they ever got paid off

- Banks provided an excess of capital by laying off the loans on investers as CDO's

- Mortgage servicers had no incentive to keep people in there homes and made money through expensive and wasteful foreclosures then benefited them but destroyed the homeowners, encouraged housing abandonment and degradation and destroyed the residual value of the CDO's

B) Could the housing bubble have been avoided? Yes

- The people who lend money can and should be forced to have an interest in making sure the loans are sound. There are many ways of doing this. Lender should be required to maintain a substantial portion of the risk of default.

- A key enabler of the housing market bubble and CDO fraud were the ratings agencies who somehow managed to transform toxic waste into AAA bonds. They traded there credibility in for cash and the public paid the price



C) The housing market collapse did not have to lead to a financial meltdown.

- If the loss in housing prices was more gradual and could have been shared by home owners and banks, then the losses could have been absorbed and people could have stayed in there homes. But this did not happen because loan servicers made more money from foreclosures and had not desire to let people stay in there homes. This accelerated the rate of foreclosures that started a death spiral of abandonment, neighborhood blight further reductions in home values and more foreclosures.



- Even with all this the market might have held up if it wasn't for credit default swaps. Thanks to the "investment Modernization Act" these were unsecured unregulated and mostly out of sight. For every dollar in lost mortgage debt there were Ten dollars of Credit default swaps held that may or may not get paid off.



With all this uncertainty, a mortgage crisis metastasized into a full fledged banking meltdown. Nobody knew if the Swaps they wrote to hedge there bets were good. Nobody trusted other peoples books, the overnight inter bank interest rate skyrocketed and the financial markets threatened to seize up.



and finally D) Could the housing market drop be contained and the financial crises avoided? Again the answer is yes.



- First, mortgage services should be required to act for the benefit of the bondholders (many of who would be banks), or better yet, lenders should service there own mortgages like they use to do. Home owners could then be allowed to stay in their own homes if they were able to pay market rents on their homes or support a mortgage at then current housing prices and interest rates. Throwing a person out of a home they can afford at current prices only leads to abandonment, and housing deterioration.



- Finally credit default swaps must be reigned in. People who write them should be required to carry adequate reserves like insurance companies. Outside parties without cash at stake should not be allowed to use credit default swaps as a way to make bets that only serve to amplify the impact of financial problems.



The financial crises was foreseeable and preventable, we just don't have a government that is willing and able to serve the real interests of the American people.