Like the movie "Liar Liar", it would be an interesting world if everyone told the complete, absolute, honest truth for a day. Every day we are confronted with "half truths", "plausible denial ability", obfuscation and just plain outright lying. That little white lie just seems to avoid the pain of consequence, but experience seems to show that it just kicks the can down the road, and eventually the truth will come out.
Locally we have had the Melbourne Storm Rugby Club being severely punished because of lying about breaching salary caps. But it wasn't just a lie, it was a systematic rigging of the records. A defence could be, "but everyone does it", but is it right? Is the new generation being taught that it is OK as long as you can get away with it.
Greece wanted to become a member of the European Union in 2002, but its debt to GDP ratio breached Euro guidelines. Along comes Goldman Sachs who do a swap transaction with Greece, which resulted in the country "on paper", meeting the Euro fiscal guidelines. Greece becomes a member and the rest is history. The lie was that Greece had their domestic spending under control, but they didn't and now the lack of action has made the problem bigger, and threatens other Countries who trusted them. Unlike Melbourne Storm,there is no consequence for Greece, other than the other "teams" in the Union being required to provide a rescue package to pay for their prolific ways.
The most interesting segment for me watching the US Congress grilling Goldman Sachs this morning, was when a Senator asked, in effect, "when did you have the lucid moment when you realised that the Mortgage market will collapse". It was a trick question really. If Goldman Sachs (GS) admitted that as a firm it believed the market would collapse, then the next logical question is, "then why do you continue to market these investments". GS said it was only meeting investment demand for these assets. You cannot suggest that GS is lying, and the people investing in these toxic assets are professional investors who should know the risks. But the logical conclusion to everyone's arguments is that if nobody did anything wrong, and nobody has been found guilty of doing anything wrong, then the whole Global Financial Crisis is just an unfortunate series of events. The Public is looking for someone to blame, but the real victim of this crisis is the concept of trust.
Since the 1933, the Glass-Steagall Act was introduced to curtail speculation by separating the functions of commercial banking and investment banking. The Act also introduced the Federal Deposit Insurance Corporation (FDIC), which guaranteed bank deposits. It was thought that it was prudent that the deposit taking institution should not really be speculating in risky assets. In 1999, President Bill Clinton signed into law, supported in the Senate 90 - 8, a Bill which revoked the Glass-Steagall Act. Score 1 - Lobbyists.
The concept of "too big to fail" started here, as Banks like Citigroup grew into huge organizations able to underwrite and trade mortgage backed securities and CDO's. One of the reasons given to repeal the Act given was: "Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms.(Wikipedia)". You would have been silly to believe it, but it would have been difficult to predict what manifested.
In 1998 the sub-prime market was 5% of the total. This grew to 30% in 2008 as the GFC developed. With the bank deposits supported by Federal Guarantees, there appeared little risk in participating in the explosive growth. The bank deposits liabilities were guaranteed, and in the end their assets were guaranteed as well.
The concept of responsibility for actions seem to have removed from the system for the larger Financial Institutions. You probably would have been sacked if you didn't match the growth of your counterparts.
I don't think I see a real solution or a real process of change, and it appears that the Keynesian philosophy of Government spending and low interest rates are determined to re-inflate the Global debt bubble. Last night China announced a 4 Trillion Yuan stimulus package. The US 10 year interest rates rallied to 3.69% with short term rates at zero, maintaining the pressure for assets to chase returns.
Do you trust that the Governments around the world are following the best course of action? Probably not, but as the market is bigger than any individual, you have no choice but to follow the flow of funds.