The other night on CNBC my friend Barry Ritholtz told a good story. He said that for the time in credit market history loans between 2002 and 2006 were made on the basis of the ability to cut up and syndicate the debt, as opposed to lenders' ability to pay.
It's a good story. But is it true? No, other than in the most superficial sense. I'm assuming Barry was really saying that it was the first time loans were made because there was an external appetite for the loans as byproducts, instead of lender concern about prudently putting out money that could be paid off. (If instead Barry meant that it was the first time in history loans had been syndicated, then that's a trivial point, like saying this was the first time Countrywide had failed.)
So, was it the first time that credit market push created a problem in debt markets? Of course not. Almost every banking crisis back almost 200 years has had much of its roots in the sudden explosion of credit availability, without regard for people's ability to likely pay off the loan in any reasonable risk-adjusted scenario.
Look at the crisis in the 1870s. It was driven almost entirely by a flood of European capital into U.S. banks without regard for the wild and uneconomic overbuilding of railroads that ensued. Lenders were under pressure from European institutions to put the money out, and so they put more money out.
Sound familiar? It should, because it ended very similarly to the current crisis.