Sunday, March 29, 2009


Just think, the Great Financial Meltdown of 08 was caused by something as simple and innocent as people wanting to own that sine qua non of the American Dream, i.e. a house. A young couple with a baby buys their first house, which purchase enables a couple with three kids to move up to a larger house, which enables a banker and his family to spend his bonus on his petite manse. And so up the line the chain transaction went, a purchase leading to another purchase leading to another purchase. At every step was a smiling mortgage broker or banker willing to lend on increasingly exotic and generous terms in order to maintain market share and rake in ever larger amount of shekels. The Fed was leavening their dough with massive amounts of liquidity and the lowest fed fund rates ever. The originator of the loan would then turn around and flip it to Freddie or Fannie, both of whom were under increasing pressure from regulators and the Barney Franks of Congress to make sure every American was able to do so, no matter how flimsy his or her credit qualifications might be. In the case of loans that were too large to qualify for Freddie's and Fannie's limits, the Wall Street firms and other players like Countrywide happily stepped in and took the loans. Fannie/Freddie, Lehman, Bear Stearns, Countrywide, et al next packaged all these mortgage loans into securities and sold them to suckers all around the world, from the local college endowment fund to Singapore pension accounts. There was no shortage of buyers since these securities offered great yields for the triple A ratings that the rating agencies stamped on them, rating agencies that we now know really didn't understand what they were rating. And oh what a wonderful world it was, everybody getting their little pinch of dough as the urge to own a house got transmuted into a AAA security owned by some credit bank in Germany.

And then the daisy chain turned into a cluster fuck. All it took was a slight breeze and the house of cards toppled over. All it took was a slight uptick in interest rates, a leveling of housing demand, rumors of a couple of Bear Stearns hedge funds having problems to send investors stampeding toward the exits. It was like someone shouting, "Allah Akbar" in a crowded Baghdad market, everyone expecting the next sound to be KA BOOM!

Somebody during the Roaring Twenties said that prosperity swallows all sins. I suppose that the converse is true as well, namely that poverty pukes up all sins. The peasants have gotten the pitchforks out of the barn, lit up the firebrands and are searching every dark corner of the village for the sinners who caused this catastrophe. The blame game is a natural part of every boom-bust cycle; and since this boom-bust cycle has been especially vicious, the blame game has been vicious as well. Indictments fly like bats out a cave.

I pity those AIG guys. They are the scapegoats du jure. Mobs march outside their offices, a US senator suggests they do the honorable thing and commit mass suicide, that thug NY State AG, Andrew Como, threatens to release their names if they don't give up their bonuses. Como, what an asshole. He knows that the ACORN manufactured mob is in full froth and lather and ready to "exact justice." Given the temper of the times, would he really release names? Why would a responsible person even threaten to do so? The threat is real enough that some of these guys have moved their families out of town to the in-laws until cooler heads prevail (and who knows when that might be). The company in broad daylight offered these guys retention bonuses because AIG needs their expertise to wind down those disastrous positions in a way that will keep them from becoming even more disastrous. The evidence shows that Como, Congress, Gaithner all knew about these bonuses before the NT Times made them public. So where was the outrage then?

I am particularly tired of hearing about the outrage in Congress. The amount of AIG retention bonuses is $165mm, about what Congress just authorized to spend on waterparks in the recently passed stimulus bill. If anybody is to blame for the housing collapse, then those elected officials who put the Community Reinvestment Act on steroids and brow beat Fannie and Freddie into making stupid loans should be first in line. But for once that cliche "We are all to blame" holds true in this case. Everybody got something from the run up in housing prices over the past decade, everybody including the real estate agent, the appraiser, the closing attorney, the mortgage broker, the lender, the Wall Street banker who securitized the loan. And the biggest beneficiary was anyone who bought a house during those giddy times; in other words, just about everybody. We all knew, in the back of our mortgaged minds, that these housing prices were too good to be true. And so we milked it as much as we could, mainly by taking out equity lines to sap the crazy appraised values that justified the dumb loans.

How can you call someone a victim who was able to purchase a home that he had never in his wildest imagination thought that he could afford. And in reality he couldn't afford it. Many of these "victims" would have been better off remaining renters. Loose credit can perform magic of a sort. But instead of pulling a rabbit out of a hat, the lender-magician ends up pulling out a turd instead.

Congress is now talking about modifying mortgages for those struggling to make the monthly payment. Before we rescue somebody from foreclosure, maybe we should ask them to give up the flat screen HDTV that he purchased through his equity line. How many vacations, appliances, autos, wardrobes were paid for through equity lines? Like manna from heaven.

So what do we do now? I'm struck by the paradoxes contained in the solutions being offered to cure us of this malady. For years, even decades, we have been told by scolds that we borrow too much, spend too much. We all shrugged that off, but now the chickens have come home to roost. And what are the same scolds now telling us to do? Borrow and spend more. Don't save, consume. And if we were worried about those Bush deficits that got as high as $450 bil., we are now be told to be thrilled with Obama's trillion dollar deficits as far as the eye can see. All these proposals, all these Fed actions, all these new acronyms such as TARP, TALF are just whistling past the graveyard, dancing around the root problem, which is the roughly two trillion dollars of bad assets clogging our credit system. We are trying to paper over that two trillion with ten trillion of debased currency.

If the system is clogged, then get a roto-rooter. This is not going to be painless. Sure, all this spending might cause a temporary spike in the economy that might last a year or two. But right behind that will be an inflation dragon that will make the inflation during the Carter years look like a gecko lizard. The Fed will then have painted itself into a corner as it will either have to jack up rates like Volker did and possibly cause the depression that we have all been dreading or else resign itself to a banana republic inflation and depreciation of the currency. The economic, social, geo-political consequences of that latter course do not provide for serene contemplation.

The only true and sure way of getting of out this economic malaise is to recognize what those two trillion dollars of bad assets are really worth. The consequences of this will be severe but cathartic. Banks will fail. Big banks. But a year or two from now, we will be on the road to economic salvation and not facing hyper inflation. We must, brothers and sisters, atone for our sins. Only that way leads to redemption.

No comments: