Part of the problem, I think, is related to the ability to assess risk. There has been a trend over the past 30+ years to try and quantify risk. As we all know, the interest rate charged on any given loan reflects the assessment of the risk by the lended – the more risk, the higher the interest rate charged as a result.

Back in the day, lenders knew their borrowers personally, or by reputation, and lent money accordingly. With the rise of state and federal regulation and oversight, the auditors/regulators did not know the borrower as well as the lender did and therefore wanted/demanded a quantifiable indicator of the risk – hence the rise of the “credit score” as a suitable metric. The dependence on this and other metrics meant that a loan, or group of loans, could then be packaged in such a way as to statistically reduce the risk to near zero – which opened a secondary market far removed from the initial borrower and lender.

Now we are seeing the results of those policies. Reducing risk statistically does NOT eliminate it. When there are enough risky loans, and when they fail as they must due to the feeble financial underpinings of that particular loan, it is enough to bring the system down.

Further, those lenders who have joined the business recently have no knowledge of how to assess risk without using the metrics – they never learned how to do the math without using a calculator, as it were. So, they are sitting on they bailout money, waiting for the regulators to tell them how to do their job or perhaps to relax the rules so that they can go back to the old fashioned way of doing their job.

It is a standoff of the first order.