I guess my question to you would be, how would you effectively regulate against this behaviour? Calling for more regulation is easy to do. Crafting the actual regulations so that work is another animal all together.
Financial managers would certainly disagree with you that it was basic fraud, from their perspective they thought that they were helping by creating complex financial instruments that would minimize risk. Many investment risk managers thought that they had moved beyond risk in the year prior to the bubble bursting. Fraud implies that people are purposefully misleading people for profit. But considering the staggering losses in the financial sector it would seem like this isn't the case. Many investment bankers have lost their shirts.
I agree with you about the markets being inefficient. Markets should not be experiencing this amount of concentrated boom-bust behaviour. Something is definetely wrong. I would trend to the opinion that the problem is too much government involvement in finance and loose monetary policy. If these banks and investors were allowed to fail then a considerably higher amount of priority would be placed on evaluating the financial instruments that people were buying into.
It seems absolutely assinine to me that there was such a gap in information for investors that they believed that sub-prime loans were going to be repaid. Would regulation actually fix this? Would regulators have known that these complicated securitized holdings were valueless? Doubtful. Markets should be able to respond to this risk much easier if, infact, investors knew that they were going to be on the hook for any potential losses.
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