Money and banking question?

Money, Banking and Financial Markets question related to the recent economic disaster?

• Investment banks, commercial banks, rating agencies and mortgage bankers have all been blamed for various facets of the recent economic/financial crisis. 1) What services did they perform in the financial market related to the financial/economic crisis? 2) What was their role in the financial crisis? 3) What, if any, services did they perform inadequately? 1) Did they perform such services as a principal or agent? 2) Who were their primary clients? 4) If you were a consultant to Congress, what recommendations would you make regarding the group that you selected to address their activities and thereby that financial crises do not occur in the future?

• Answer:

  Banks created money out of thin air (fractional reserve banking) and loaned this easy money to individuals (fooled by the low interest rates set by the Fed) causing a housing boom as people rushed to invest in housing. Mortgage bankers also created securites and derivatives, to insure these mortgages against loss, and to allow investment bankers to gamble on their value (with cheap easy credit from the Fed). For example, here is a simple explanation of what went wrong with "collateralized debt obligations" - CDO http://www.zerohedge.com/article/bank-cdo-self-dealing-and-modern-sotck-trading-dummies Ratings agencies rated these securities as "AAA" i.e. very good investments, without even understanding them (or the risk of them), because the banks said they were good. Warren Buffet, one of the richest men in the world, called derivatives "financial weapons of mass destruction", but nobody cared because they were all making money. 4- If I was a consultant to Congress I would tell them to stop interfering with the economy. Also, abolish fractional reserve banking to prevent massive uncontrollable increases in the money supply, which fuel speculative bubbles and economic "booms". End the Federal Reserve and their price fixing (of money ie interest rates) activity, which destabilises the economy. Allow the banks to go bankrupt. The constant bailouts will result in hyperinflation - these must be stopped NOW. However despite this more bailouts will happen, including the FDIC (bank insurance scheme), state governments such as California, state and federal pension schemes, and the federal government. All of these are bankrupt already and it is only a matter of time before they are bailed out. If I was actually a consultant to Congress I would tell them 4) above, send this to a newspaper, and then set myself on fire. They would still not pay any attention. The video below is one solution to the problem. It is very pro-government in theme (which actually sickens me to watch) but will give you some idea of the economic problems today. I prefer solutions based on the Austrian economic school (mises.org).