Mr. Market is popping xanax and quaaludes like Jelly Bellies (from bygone years; he's kept an ample supply) with the results from France and more agita in Greece.  Seems an opportune time to discuss what the mainstream pundits avoid.  How did we get here?

The mainstream pundits, by and large, and civilians nearly to a man, when asked would say "the banks crashed because of the subprime mess".  And, as the proximate cause, that's not too wrong.  But doesn't follow the breadcrumbs back far enough.

The first step back up the trail, is to ask why subprime?  It's been documented that mortgage companies and banks set off to loosen requirements (ultimately, to "declared income" subprime ARM instruments) in order to satisfy the demand for CDOs derived from home mortgages.  Why?  Because the so-called "sophisticated investors" (that's how they're described whenever some entity goes to place shares or notes to a select few), are just as gullible as retail plungers.

Those with accumulated wealth, especially when the accumulation is multi-generational, adopt an entitlement attitude toward their positions; economic, societal, and political.  Mitt isn't an outlier, he just lives, as they all do, in his own bubble.  The demand for housing CDOs (and credit default swaps) derives from conflicting (although not acknowledged in the minds of the bubblists) demands:  maximum return with minimum risk.  They wish to live off the fat of the land, forever.  As stated in this endeavor many times, return on invested capital is only real (as in "reality based decision making", anathema to Dubya and Dick) if the capital (aka, moolah) is used to build or acquire physical goods (equipment is a good description) which increase productivity.  (Aside:  it's well documented that service sector is the least productive.  Betcha didn't know that!)  Make more stuff cheaper or make the same stuff even more cheaper.  Either way, capital earns its reward.  The cost-cutting approach is anti-growth, of course, and kills the golden goose (aka, the middle class) in due time.

It was demand for mortgage CDOs that drove the economy off the cliff.  But why?  Why did capitalists dive into them to such a degree?  The answer has to be:  capitalists couldn't find productive uses for capital in productive investments.  I'll say that once again:  those with accumulated wealth (people and corporations-is-people) couldn't figure out how to be productive investing their wealth.  Adam Smith should be rolling in his grave.  So far as he was concerned, the only justification for capitalists was their superior ability to make better use of wealth.  Pure and simple.  But, our simpleton capitalists of today can't do that.

As a result, they turned to specifically unproductive uses of their moolah.  Remember, the only way a household can pay a mortgage is to forgo other expenditures.  The larger the mortgage payment, the less it spends on movies and cars and even food.  Mortgages, from a macro-economic point of view, are a zero-sum game.  Yes, there are those ads on the TeeVee which claim that each house "creates" one job.  I suspect that's a very fuzzy number, derived from questionable sources.  What matters, in such assertions, is whether other uses of the funds would have a greater or lesser multiplier effect.  Physical productive investment is greater.  Take my word for it.

Let's walk another step back the breadcrumb trail.  Rather than let Dubya have a recession, Greenspan crater interest rates in 2001.  That should have led to a boom in real investment, one would think.  But, on further reflection, all that did was increase the spread between "safe" housing investment and Treasuries.  For all those wimpy capitalists, Treasuries were no longer the mattress-place to hide cash.  Housing now became the place.  In order to do that, more CDOs had to be manufactured by mortgage companies and banks.  And so they were.

Would all those CDOs been marketable without the complicity of the credit raters?  Of course not.  But they relied on the mortgage companies and banks to play by the rules, long established.  They weren't, and the credit agencies didn't really want to know.  

The living off the rising equity in the house syndrome took hold, big time.  During Dubya's reign, median income continued to stagnate, even falling some years.  The middle class was being butchered, and it didn't even whimper.  How many of you, dear reader, took out home equity loans to pay for fishing boats, cruises, and new cars?  What you should have been doing is voting Blue State, but you didn't.  You didn't look beyond the end of your dick, nicely risen on home made Cialis.