The Real Cause of the Financial Crisis

Don’t blame Wall Street for the financial crisis.

Well, I guess you can blame Wall Street all you want – after all, the risky behavior taken on by Wall Street definitely played a role.

But for the real underlying cause of that risky behavior, you have to dig a little bit deeper.

First off, why and how would Wall Street’s “best and brightest” financial wizards pursue risky behavior?

As to why, the answer is that they were practically guaranteed to be backstopped by the Federal Reserve and the U.S. Treasury in the event that they failed. So there was essentially no real risk associated with their risky behavior.

And for how – the easy-money policy from the Fed made it highly lucrative to shuffle risky mortgages around. Remember, this low-interest rate environment was put into place by the Fed as part of the federal government’s initiative to increase home ownership.

It’s a classic case of unintended consequences. The government constantly pursues its pet projects in an effort to do what it thinks is popular or helpful (or self-serving) – but every single time it neglects to remember that every action it takes sends ripples of speculation, misallocation, and faulty signals to the market.

Without ridiculous federal initiatives that made it highly profitable to create mortgage products, there’s no housing bubble. There’s no subprime blowup. There’s no trillion-dollar credit default swap market on reinsurers like AIG (NYSE: AIG).

Right now the Fed’s sticking with the same exact playbook that caused the financial crisis in the first place – except now they’ve turbo-charged their efforts.

It’s not enough to have low interest rates – we need zero-interest rates. It’s not enough to accommodate growth, we need to print money to give to corporations and banks so that they hire people and make loans.

So what’s the pet project that the Feds are fretting over today? What do they think is popular or helpful or self-serving?

And what will the next crisis look like?

Today, the Feds have all but turned their backs on employment. So that’s out of the picture.

The housing market has scared most consumers making them shy about buying a new home.

So the Federal Reserve and the Federal government seem keyed in on buoying the stock market.

That’s the metric everyone seems to pay attention to. And just like with the housing market, I expect that we’ll continue to see huge gains made in stocks…

Until the bottom drops out.

It’s a great time to trade stocks. You buy today and in a few days or a few weeks, you cash out for gains. This strategy will work fabulously until it doesn’t. And I can’t say when it will stop working.

But what I can say is that while everyone’s piling into and out of stocks, the commodity story is being ignored. And the thesis for owning commodities is as strong as it’s been in the last five years.

Even with the small rallies in silver, gold, oil and natural gas over the past few months, these commodities are still well off their highs. Don’t be distracted by the government’s funny-money fueled stock bubble. Take the time now to build your position in these real assets.

I know I will.

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