The real cause of the financial crash
A well-known banking analyst says greed didn't cause the problem. Our reliance on China did.
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.
Copyright © 2014 Microsoft. All rights reserved.
An interest rate tease in The Wall Street Journal sends the market into an optimistic tizzy -- but one that doesn't end quite at the top.
VIDEO ON MSN MONEY
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.