Russell Roberts writes for NPR.org:

“[Treasury Secretary Paulson] can inject all the money he wants into the consumer credit market and it isn’t going to make us want to buy cars or use our credit cards.

We did enough of that for a while. More than enough. Too much. And right now, before we spend, spend, spend, we’re going to wait and see if we keep our jobs. [...]

When no one knows how the rules of the game are going to change — and they seem to change from week to week — who wants to take a risk? Who wants to borrow money? Who wants to invest? Business and consumers are hunkering down, waiting for the storm of change to pass.

The problem isn’t liquidity.

It’s uncertainty.

Paulson doesn’t realize that his erratic attempts at creating liquidity are creating the uncertainty that makes liquidity meaningless.”

When it comes to the financial “crisis” (I still don’t like using that word…it’s an invitation to deprivation) I’ve heard various explanations for what got us here, but most of them go something like this:

“Greed got us into this mess”, or, “Banks were way too leveraged so they could make a buck in the short term”, or, “lenders took advantage of borrowers who didn’t know any better and gave them more loan than they could afford”.

I have several questions in response: When did people all of the sudden become more greedy?  Can you give me a date?  Did greed suddenly increase in the mid 1990’s?  Were people in prior decades not greedy?  Is greed a new phenomenon?  When did banks all of the sudden decide to become overleveraged?  If they could have made all kinds of money being overleveraged before, why did they wait until the mid 1990’s?  Why weren’t banks pushing these risky loans long ago?

The obvious answer to all of these questions is the old adage, “there’s nothing new under the sun”.  Greed is not new, and people are no more greedy today than they’ve ever been.  Banks did not all of the sudden decide to overleverage and start pushing bad loans - to do so would be against their own (greedy) interest, as we now see with many collapsing.  If you want to make greed the culprit, you have to also make it the culprit for everything else that happens in the economy, since people are always greedy (or, if you prefer a less pejorative term, self-interested).  That means when wages rise, stocks grow, unemployment drops, gas prices go down and poverty shrinks you have to also blame greed.  Greed is ever-present, so it’s unfair to only blame it when things go bad but not when things go well.  Blaming greed is like blaming gravity.

These childish analysis cannot account for our current financial situation.  But what can?  Why would banks all of the sudden make overly risky loans?  If it wasn’t in their interest to do so before, why now?  Because the rules of the game changed.

I’ve blogged on it here before, and there is lots of great analysis elsewhere (look here and here), but the bottom line is Uncle Sam changed the rules of the game by mandating banks to take bigger risks, creating a “moral hazard” by implicitly or explicitly promising to bailout those who failed, and by sending false signals through the market via artificially low interest rates (which induce more lending than real economic productivity would warrant).  To summarize, banks and financial institutions behaved in a way counter to their own long-term interest because government made it beneficial and in some instances necessary to do so.

Tom Brokaw writes in the Wall Street Journal’s opinion pages :

Barney "Big Un" Baumgartner of Windblown, Wyo., invited the Federal Reserve and the U.S. Treasury Department to take over his business, The Big Un 24 Hour Tow Service and Trophy Taxidermy.

In a handwritten press release, Mr. Baumgartner explained that with winter and hunting season coming on, the good citizens of Windblown would be without his vital services unless he found a way to deal with his escalating debts, fast.

"This is not just about me or my neighbors in Windblown. Heck, we get three or four tourists and out-of-state hunters here every 10 days or so. What if they need a tow or a trophy mount? The consequences are too great to contemplate," Mr. Baumgartner explained.

He’d be willing to let the government have 80% of his business for a quick cash infusion. He thought something in the neighborhood of $1.8 million should do the trick. That would be enough to gas up his two tow trucks, get some new taxidermy stuffing and clean up that overdue account at the Number 10 Saloon and Casino over in Deadwood, S.D.

Treasury Department officials had no comment on Mr. Baumgartner’s request, but a source familiar with the response to the bailout of American International Group said Treasury has been inundated with similar requests.

- A pawn shop in Reno, Nev., has an excess supply of eight-track cassette players, flower print shirts, broad white belts and Wayne Newton tapes, having gambled that the ’70s would come roaring back. The owner pleaded for a Treasury take-over, arguing, "How can the government stand by and let such a rich part of our American culture simply fade away?"

- The owner of an NFL poster shop in Green Bay, Wis., reports that he has given up on divine intervention and is now asking for Treasury to take over his business in a last-ditch effort to preserve the notion that whatever our differences, we’re all Americans.

Asked how his business got into trouble, Karl Andursen of Muledeer, Minn., said he met a man who specialized in printing Minnesota Viking and Chicago Bears posters. Mr. Andursen said the man was willing to bundle his posters and sell them at a discounted rate to anyone who would take over the Green Bay territory.

Mr. Andurson said in the back of his mind he knew that could be risky since Green Bay is sacred ground for Packer fans who wouldn’t cheer for the Vikes or the Bears if they were promised a fleet of new snowmobiles and lifetime hunting rights on Brett Favre’s farm.

But, as he said, everyone was in the NFL merchandise game and he figured he’d take the territory and after 30 days flip the franchise for a big profit. A year later and he’s not made a sale, not one, but who knew?

He’s offered his complete inventory of Go Bears! and Vikings Rock! posters for 20 cents on the dollar or $500,000 in 30-year Treasury bonds.

- Darlene Dalrymple owner of the Shear Joy Hairstyling and Tattoo Salon in Rockhard, Vt., wrote Treasury Secretary Henry Paulson, inviting him and Federal Reserve Chairman Ben Bernanke to her shop for a free trim and tat if they’d also help with her balance sheet.

Ms. Dalrymple said she’s very busy, but her expenses somehow always exceed her income. She suspects her boyfriend, who likes to use a lot of Wall Street lingo he picks up watching business channels on TV, is shorting her cash register.

Ms. Dalrymple said her boyfriend also called her a moral hazard, and she’d like Secretary Paulson and Chairman Bernanke to explain exactly what that means.

From the New York Times.  We reap what we sow…

Fannie Mae Eases Credit To Aid Mortgage Lending

By STEVEN A. HOLMES - Published: September 30, 1999

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Entire article here.