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The Depression of 2007 -

Many years ago, Dr. Dewey Daane, a renowned economist with 35 years of service in the Federal Reserve System and the U.S. Treasury Department. Daane noticed that there was too much heavy borrowing by Wall Street. He accurately described the collateralized debt obligations (CDOs) increased risk in the financial markets and that capital reserves were running thin.

To put this in terms we can understand, look at what happened. The mortgage lending system was flawed because loan originators retain no residual risk for the loans they issue, but collect substantial fees on the loan issuance, which caused unchecked degradation of underwriting standards. When underwriting standards became more lenient, the credit rating agencies failed to report it to the investors buying CDOs. Investors rely on these ratings because they have no way to monitor credit performance and/or estimate expected cash flows. Once CDOs (loaded with subprime loans) stopped performing as well, major loss of confidence occurred in the validity of the process, which ultimately led to the credit market bubble and then the housing crash.

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