The real cause of the financial crash

A well-known banking analyst says greed didn't cause the problem. Our reliance on China did.

By Kim Peterson Nov 19, 2009 1:05PM
Bubble © Kyu Oh/Getty ImagesGenerally, when people lay blame for the U.S. financial crash, they point to the greed and the make-money-at-all-costs attitude on Wall Street.

They're wrong, says noted banking analyst Richard Bove.

The real problem, he said, is that the U.S. was pouring money into China to buy goods instead of producing its own goods to sell globally.

"All explanations concerning how we got into this crisis are incorrect," he said, according to The Deal.com. "They dwell on the fact that there was too much greed, fraud and excess on Wall Street. Certainly, that occurred, but it wasn't the reason we got into the banking crisis."

Here's the chain reaction of events, according to Bove:

1. The U.S. doesn't make its own goods, instead buys cheap products from China.

2. China builds a $2 trillion trade surplus backed by dollars.

3. The U.S. looks for a place to invest all that money and chooses the real-estate market.

4. Banks start making subprime loans, and then repackaging those loans into bundles of credit default swaps, mortgage-backed securities and collateralized debt obligations.

5. China buys lots of those bundled loan securities.

6. U.S. debt grew three times faster than income growth in 2007.

7. U.S. economy crashes.

Lawmakers aren't focused on the true cause of the problem, Bove says. The financial reform being enacted will lead to three more problems:

1. Banks will be required to keep more cash instead of loaning it out.

2. Banks won't be allowed to raise overdraft fees, which will lead to about 30% of accounts being unprofitable. Banks will begin dropping customers.

3. America will have a smaller share of the world's financial system.

200Comments
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
284
284 rated 2
461
461 rated 3
671
671 rated 4
628
628 rated 5
618
618 rated 6
615
615 rated 7
495
495 rated 8
347
347 rated 9
115
115 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
DYNDYNEGY Inc10
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.