The Story That Didn’t Sit Right

Before 2008, I wasn’t political. I had the standard-issue assumptions that most people around me seemed to share. Large corporations exploit people. Bankers are greedy. The system is rigged in favour of the wealthy. I hadn’t thought deeply about any of this. It was just the water I swam in.

Then the financial crisis happened, and everyone had a clear explanation.

Greedy bankers lobbied governments to loosen the rules, then used that freedom to make increasingly reckless bets on the housing market, packaging risky mortgages into financial products almost nobody understood. Rating agencies, paid by the banks themselves, stamped these products as safe. When the bubble burst, ordinary people lost their homes and their savings. The banks got bailed out with taxpayer money. The bankers kept their bonuses.

I was predisposed to believe every word of that. It confirmed what I already thought about bankers, about corporations, about the system. Everyone around me accepted it. The news repeated it. Politicians repeated it.

But something nagged at me.

Greedy bankers… lending money to people who couldn’t afford to pay it back?

That was the opposite of what a greedy banker would do.

The Scrooge problem

My mental image of a greedy banker was something like Ebenezer Scrooge. Hoarding wealth. Lending it out reluctantly, and only on terms that guaranteed he’d get it back with interest. Tight-fisted. Cautious to the point of cruelty.

But the bankers of 2008 were being vilified for the opposite. They’d handed out money to people who were never going to be able to repay it. Whatever that is, it isn’t Scrooge. A greedy person doesn’t get rich by giving money to people who can’t return it.

So why did they do it?

Following the money

The answer I found was securitisation. Banks weren’t holding onto these risky mortgages. They were packaging them into complex financial products called collateralised debt obligations (CDOs) and selling them on. Make the loan, pass the risk to someone else.

That made the bank’s behaviour make more sense. They weren’t being generous. They were extracting profit from the transaction and letting someone else worry about whether the borrower could actually pay.

But it raised a new question. Those CDOs were notoriously difficult to evaluate. The whole point was that they bundled thousands of mortgages together in ways that made the underlying risk almost impossible to assess. So why were rating agencies stamping them as safe? And the bigger question: why were investors pouring money into products where they couldn’t properly evaluate the risk?

Why would anyone trust the ratings?

I kept hearing that institutional investors, pension funds, insurance companies, were putting enormous sums into these products because they assumed governments would bail them out if things went wrong.

That made some sense. But I couldn’t help wondering why they’d think that. Before 2008, government bailouts of failing banks weren’t established fact. They were an assumption. Lehman Brothers didn’t get bailed out, and its collapse nearly took the whole system down with it.

More importantly, this explanation still cast the problem as entirely private sector recklessness. Greedy investors, greedy banks, reckless behaviour all around. The government was just the responsible adult who had to clean up the mess.

I wasn’t satisfied.

The deregulation question

The narrative said that banks had pressured governments to cut regulation, and that this deregulation enabled the reckless lending. I’d accepted that part without much thought. But when I sat with it, something else didn’t add up.

No amount of pressure and persuasion absolves a government of its responsibility for the legislation it passes. That is the entire point of having a regulator. If someone tries to pressure the government into doing something that isn’t in the public interest, the government’s job is to resist that pressure. That’s what we pay them for.

If the regulator folds because the people being regulated asked nicely, the failure belongs to the regulator.

I’m not pretending lobbyists don’t exist. They do, and they spend large sums trying to influence people in power. But they’d been doing that long before 2008. There are always powerful and influential people trying to shape legislation in their favour. Cutting through that noise and acting in the public interest is precisely what government is supposed to do. If it can’t manage that, what is the point?

The question that changed everything

Even setting deregulation aside, the fundamental puzzle remained. Why were so many people across the entire financial system trying to make money by lending to people who couldn’t afford to pay it back?

This is where I found something the prevailing narrative tends to skip past.

In the decades before the crash, governments across the developed world had been on a mission to open up homeownership to families from poorer backgrounds. And it’s easy to see why. Being locked out of homeownership is not a minor inconvenience. It means having no asset to fall back on, nothing to pass on to your children, and less stability in every part of your life. This was a real problem, affecting real families, and governments were right to want to solve it. Politicians on both sides championed it. In the US, it became an explicit policy goal. Government-sponsored enterprises like Fannie Mae and Freddie Mac were created specifically to make mortgages more accessible by buying them from lenders. Banks were put under pressure to extend credit to underserved communities.

These were good intentions. I share them. Most people do.

But the effect was to create an environment where the most profitable thing a bank could do was exactly what we later vilified them for: lend money to people who were unlikely to pay it back. The government wasn’t just failing to prevent reckless lending. It had been actively encouraging it.

Suddenly, the picture started to make much more sense. Not greedy bankers acting against the system, but everyone in the system responding to the incentives that government had put in place.

The final piece

Later, I discovered that regulations required large institutional investors (pension funds, insurance companies, and the like) to hold a certain proportion of their portfolios in AAA-rated assets. This was meant as a safety measure, to ensure they held reliable investments.

But the effect was to create enormous artificial demand for products with that rating. Banks needed to manufacture things that could be rated AAA. Rating agencies, paid by the banks, were under commercial pressure to provide those ratings. Investors weren’t just trusting the ratings voluntarily. They were following rules that government had set.

The chain of incentives ran: government requires AAA holdings, banks need to create AAA products, rating agencies need to rate them AAA, risky mortgages get packaged and stamped as safe. Each link in the chain was responding to the structure that regulation had created.

Being honest about fraud

I want to be clear about something. Not everything that happened was just people following incentives. There was genuine fraud. Mortgage originators falsified income on loan applications. So-called “liar loans” were real. People broke the law, and that blame is theirs.

But the fraud happened at scale because the incentive structure made it profitable and the regulators weren’t enforcing. A handful of fraudulent applications in a well-regulated system is a crime problem. Thousands of them flowing unchecked into CDOs that get rated AAA is a systemic problem. And the system was government-shaped.

What I took from this

Every thread I pulled led back to government.

Government that loosened regulations when it should have held firm. Government that actively encouraged the risky lending we later blamed banks for. Government regulation that created artificial demand for the very financial products that brought the system down.

None of it was malicious. Governments wanted more people to own homes. They wanted accessible credit. They wanted economic growth and opportunity for people who’d been locked out. These are goals I share. Most people share them, regardless of where they sit politically.

But good intentions aren’t enough. The 2008 financial crisis is what happens when well-meaning policies interact with complex systems in ways nobody predicted. Government set the incentives. Banks followed them. Millions of people paid the price.

If you still think the banks should have behaved better regardless of the incentives, that’s not an unreasonable position. But banks had been making profit for decades without causing a housing bubble. Profit-seeking was a constant. What changed was the environment government created around it. When I’m deciding where to direct my frustration, I keep coming back to the difference between a bank doing what banks are designed to do and a government failing to do what government is supposed to do.

And the people who paid the price weren’t the ones who made the decisions. Banks were bailed out and returned to profitability. The recovery took years to reach ordinary families. The very people that government had been trying to help ended up suffering the most.

This experience changed how I think about government intervention. Not because I believe government is evil, but because I saw what happens when well-intentioned policy gets it wrong on a large enough scale. The bigger the intervention, the bigger the unintended consequences. The people making the decisions are rarely the ones who pay the price when those consequences arrive.

I didn’t come to this conclusion because someone persuaded me that capitalism was good. I came to it because the story I was being told didn’t survive contact with the details. The prevailing narrative was built on a cartoon villain: the greedy banker. When I looked closer, I found something more complicated and more unsettling than simple greed.

And once one story didn’t hold up, I started wondering what else I’d accepted without looking closely enough.