What triggered the financial crisis? Theft. Pure plain and simple theft. Whenever you take great masses of money away from people in the economy, the economy suffers. It doesn't matter if its taxes that do this or theft and fraud.
Fraud helped to deliberately build a housing bubble that sucked away the money Americans had stored in their one major family investment. Housing prices were boosted by allowing people with liar loans to increase demand. This was of course obviously going to be only temporary, as eventually the liar loan homes were bound for foreclosure. Speculators made money on the rising market, and further boosted prices. Meanwhile, wall street took those liar loans and magically converted them to AAA rated securities that they sold to suckers from around the world. Those too were always destined for collapse as the the liar loans were certain to default.
People made billions from this. Then they made more money when they took your tax dollars to cover the losses. Sure, they are paying it back, largely from ever higher fees charged to you which of course are not constrained under any 'finance reform' bill. But, at best, that bailout money was gone from the American people for the last year, and thus we've lost the opportunity cost of how much better off we might all be today if we'd spent those trillions of dollars in economy stimulus and job creation and stabilizing the housing market by subsidizing homeowners instead of banks.
A trillions got sucked out of the asset sheets of American families and ended up as Wall Street profits and bonus checks. Steal that much at once, and the economy stutters and sputters like a choking lawn mower engine. That's what happens when that much wealth is stolen.
Well, that's my take. Sparked by Mr. Whitney saying in the first line that most people don't know what caused the crisis. His article is excellent as usual, and includes this bit ....
So how do the shadow banks make so much money by increasing leverage?
Here's how it works: There are three houses on the block; all of them are identical and all of them are the same price, $100,000 each.
Harry buys the first house and pays cash, $100,000 on the barrelhead.
Joe buys the second house and puts 10 per cent down, in other words, he pays $10,000.
Frank, who works for a big chiseling hedge fund on Wall Street, buys the third home and puts 0.0 per cent down; so he has zero equity.
12 months later the value of all three homes has gone up 10 per cent; so now they are all worth $110,000. That means:
Harry has made a measly 10 per cent on his investment.
Joe has made 100 per cent on his investment.
And chiseling Frank has made $10,000 pure profit.
This simple breakdown is intended to help people grasp the real purpose behind securitization and derivatives trading, which is not to make markets operate more efficiently or to "disaggregate" (spread) risk (as the proponents of "innovation" say). It is simply to peddle garbage assets which are balanced on minuscule slices of capital. It's a shyster's dream-come-true; capitalism without capital.
All Wall Street's profit's derive from some variation of this low-capital, high-risk schema.