ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Thursday, September 18, 2008

Roots of the Credit Mess

What has happened in our capital markets probably meets the definition of a crisis, and when I typed to title above it originally read "Roots of the Credit Crisis." I immediately struck the word "crisis." It is a miserably overused word ranging from the highly debatable "climate crisis" to the "health care crisis." The word has lost all meaning. So I chose to call it a "mess." The situation meets the definition of that word too.

For months I have been harping on what is going on in the housing sector. It was clear that the bubble where housing has been inflating at 20% a year was going to have serious consequences when it finally burst. Houses were going to be of lesser value than the mortgages on those houses, at least for homes bought and sold in the last few years. That was not going to look good on the balance sheets of either the home owner or the banks that held those mortgages.

That was problem enough. But it was a problem we have been through before. Booms and busts are not unheard of and they usually do not take down Wall Street.

But to this was added a huge market distortion. Some geniuses in Congress and elsewhere thought it would be just a marvelous idea to extend "The American Dream" of home ownership to just about everyone regardless of whether "everyone" could afford a home. Loans were written on preposterous terms. Income and credit worthiness were secondary concerns if concerns at all.

Then there was The Fed. Interest rates were kept too low too long. Money was, and is, cheap (ignoring for the moment whether you can get it at all just now). Money chased money and housing prices soared as people perpetually bid against one another to get houses. "Flipping" entered the language as people bought and sold in an orgy of speculation fueled by cheap money and soaring prices.

Countrywide and their ilk merrily wrote these loans. Then they bundled them and sold them into the secondary market to folks like Lehman Brothers about whom we have been hearing a bit of news of late.

Then there our friends at Fannie Mae and Freddie Mac, see "geniuses" and "American Dream" above. Add to that a dash of good old fashioned corruption, as they cooked the books to show impossible profits and their managers walked away with incredible bonuses based on those bogus profits. (Walked where? You might check to see who some of the "economic advisors" to the Obama campaign are.)

The handwriting has been on the wall for at least two years. The Bush administration has done nothing about this. McCain, to his credit, tried to do something about this in 2005 only to meet resistance from the Democrats and some Republicans.

So, now we are in the "mess." No doubt the politicians will meddle and only succeed in slowing down the market correction that is inevitable and thus putting off the equally inevitable return to equilibrium.

My hope is that we will have learned something from all this. No more idealistic dreams of extending The American Dream. no more ridiculous and artificial market distortions.

But given that this is an election year, and the foxes are in charge of the henhouse over at the Obama campaign, I rather doubt it.

Your Co-Conspirator,
ARC: MontereyJohn

Comments (1)
Brandon said...

Actually, Bush did try to do something about it in '03.

http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&pagewanted=2