Incentives and Investments

The incentives were wrong, but the incentives are always wrong. It is in the interest of those that profit from the incentives to insure they are wrong so they can benefit from them. That is why it requires an honest regulator, but despite the incentives rather then because of them, as their incentives are wrong as well.

If only good lending was allowed, then interest rates would have had to have dropped further and lenders would have to decide whether to continue to lend or to speculate or consume. If they continued to lend, the bubble would have been sustained, speculate and it would have been diverted into equities, consume and it would have expanded the economy. Any of these would have been a better solution than what we had. The big problem is when there is a paucity of good investments for the amount of saving people want, the only thing left to invest in is ponzi schemes.