In retrospect, the people we depend upon to run and regulate our economy should have seen the problems that led to the financial crash and the Great Recession. Even I, not at all an expert on housing, could see that we were in a housing bubble. Newspapers, television and magazines all provided that information.
People buy houses with mortgages. The purchases are leveraged. It should have been obvious that they were highly leveraged, especially in the face of a housing bubble in which prices would eventually come down.
So where was all the credit coming from to finance the housing purchases? Obvious questions would be are down payments sufficient to cover the risk. or are people being screened to assure their credit worthiness for the debt that they were taking on.
Surely the regulators and bankers should have known the the derivatives were making a lot of credit available by laying off the risk. Someone should have been looking to see if there was systemic risk. The people who were making the mortgage loans were unconcerned with the risk per loan since they could lay it off into derivatives, and the people who were buying the derivatives were not evaluating the risks in the individual mortgages.
But our incentive structure paid the executives of the financial services industry huge salaries and bonuses on the basis of short term profits, and the politicians were beholding to the big money paying for their elections and reluctant to impose regulations that they didn't like. And so it went....
I wonder whether we are seeing a similar thing with sovereign debt. Governments are borrowing from other governments in order to bail out governments and banks that have borrowed too much. Is there a systemic risk. The stock market seems to think so.
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