Most people don't realize it, but the banking crisis was actually predicted in 2007, one full year before it happened. The predictors weren't some amateur bloggers or self-described investment gurus selling newsletters. They weren't gold bugs or conspiracy theorists. No, the prediction I'm referring to came from one of the largest banks in the world: Credit Suisse.

60 Minutes produced a report in December 2008, just after the emergence of the crisis, which reported Credit Suisse's earlier prediction. Take a look at it. It's only about 9 minutes long and well-worth watching.

Also, look at the picture of the graph above taken from the 60 Minutes report. This graph shows anticipated levels of mortgage resets based on research into mortgages on the books as of 2007. The orange area represents the interest rate reset points for sub-prime mortgages. The yellow section represents the reset points for Option ARM and Alt-A mortgages, which are less risky than sub-prime mortgages.

The one crucial piece of information missing from the 60 Minutes report is why these loans were made in the first place. The media (including CBS) have reported repeatedly that it occurred because bankers made foolish loans. It's true, but that's not what caused the crisis; risky loans were merely a symptom. Notice how no one asks why the financial industry suddenly started to behave stupidly! For generations, the lending industry behaved much more responsibly. All of a sudden, over the past five years or so, they threw their lending requirements out the window. Why?

The left likes to claim that this happened because of the deregulation of the banking industry and because of the removal of rules (imposed during the Great Depression) separating investment banks from commercial banks. They point to the S&L crisis of the 1980s as proof, claiming that if Reagan hadn't deregulated banking the S&L crisis would never have happened. However, they overlook two extremely important points: (a) how did banks (and large corporations like Penn Central) fail before the S&L crisis? and (b) how could banking regulations have prevented the S&L crisis when the bad loans that were made leading up to it were made before deregulation?

Clearly, neither the "foolish lending practices" theory nor the "bad deregulation" theory actually make sense when you consider the whole picture. So what does make sense? What really caused the crisis? The answer is mundane and obvious to anyone who knows and understands how fiat money works. The crisis was the inevitable result of the monetary and banking system itself. And the next crisis in 2011 will also be caused by the exact same thing.

I'll have more about this in my next blog entry.