> It takes more than just misaligned incentives to get a banking crisis -- you have to have structural corruption preventing the transfer of the loss gradient back to the "misaligned" decision makers.

Nah, you can do it just on the basis of information asymmetries.

Banks can sell mortgages. People think buying mortgages is safe, because banks don't loan money to people they don't think can pay it back, and even if they did, the mortgage is backed by the house so in the worst case you can foreclose and get back your principal. So lots of people buy mortgages.

Then banks figure out that it's easy to sell mortgages, and that if they sell them it doesn't matter that much if the people they loan the money to can pay it back. Plus, the less creditworthy people pay higher interest rates, and you can still foreclose if they default. So banks make a lot of loans to people who can't afford them, and then sell the mortgages, and people still buy them.

Except that if this happens at scale, the people taking out mortgages they can't afford bid up the price of houses. And then when they start to default and you want to foreclose, you'd have to sell the house to get back the money, which at scale means that the prices would go back down to where they were before they got bid up, which means you wouldn't even recover your principal.

If everybody realizes that this is what's going to happen then people wouldn't buy bad mortgages from banks and then banks wouldn't issue them. But if enough people don't notice until after the bubble is inflated...

Let me tell you something about people...

You can sit them down and explain precisely why buying something, like a new car, is a bad financial decision and that they cannot afford it anyway, and then watch them go buy it anyway. To the point where I have seen people laugh about how dumb of an idea it is, while in the act of doing it.

The "I wish someone explained to me..." that comes later when it all falls apart is largely just licking the wounds of their damaged ego.

> You can sit them down and explain precisely why buying something, like a new car, is a bad financial decision and that they cannot afford it anyway, and then watch them go buy it anyway. To the point where I have seen people laugh about how dumb of an idea it is, while in the act of doing it.

And this is actually fine because it comes with its own integrated stupidity penalty. We only need the government to impose a penalty if the person who needs the disincentive when making a decision is different than the person being affected by it.

This is a big "hell yes" for me! Some seem to think that mortgaging themselves up to their eyebrows with huge houses and the latest vehicles is a good idea. As an example: I needed a pickup truck back in 2021. I settled on a ram and purchased the base model. The only options were a towing package and the medium level smart audio/display system for a cost of $27K. I could have easily spent $50K and got a whole lot of other options, but determined the extra cost was too much and the options weren't needed. (The only reason I purchase a new one is people tend to drive like maniacs in trucks where I live, so I didn't trust a used one.)

I digress, the numbers alone are the reason for the base model, because I could use the extra money somewhere else. And yes, new vehicles do depreciate too much. However, if you keep the vehicle for it's entire lifespan, the hit isn't so bad.

I’m always amazed at the number of 20-30 year olds driving luxury SUVs and souped up trucks.

Feels like I’m in a bizarro world where logic and math no longer apply.

Even if I could easily afford it, it seems crazy between the purchase cost and the yearly insurance cost.

They could still have a new car and use the money saved to pay down mortgage or invest it.

Most humans have to learn the hard way no matter the age.

> and people still buy them

You skip over a very important step here, where people keep buying the MBSes because the ratings agencies are knowingly rating the securities incorrectly. If that didn't happen, the market would be too small to blow up in the way that it did, all of the safe money can't invest if the MBSes aren't AAA.

It's not that no-one noticed in time, it's that the people responsible for noticing were paid to pretend they hadn't. That is the corrupt part.

It's not obvious that this was corruption though.

What they were doing was, they'd take a bucket of high risk mortgages and apply a contract to them to retroactively sort them. So, if you bought the 30th percentile of the bucket and then anything more than 70% of the people in the bucket paid their mortgages you would get paid, and if fewer than that did then you wouldn't.

Then they were rating the highest percentiles in the bucket as AAA because even for borrowers with bad credit, the probability that such a high percentage of them would default was considered very low. Even for people with bad credit, default rates are usually only something like 10%.

But that doesn't work out if you haven't noticed that banks have stopped caring about the default rate when issuing mortgages.

I disagree with the characterization of structural corruption. Every rationale actor will seek to capture all the benefits and pass on the risks. The real corruption is when decision makers know that they can’t be held responsible through corporate or political structures. See also [moral hazard](https://en.m.wikipedia.org/wiki/Moral_hazard)

Try to think of corruption as inefficiency to get the desired effect instead of some dude accepting some money under the table.

Sometimes a dude getting some money does not yield the worst outcome which is why some countries still run despite the corruption.