July 23, 2008

No. Really. Let's belabor the point.

You know, what's irritating about all the information coming out about 'Our Current Financial Crisis' is that a lot of it is really good and some of it is just a bunch of damn bullshit. The vast majority is a combination of both. This piece from the Agonist, itself an expansion on an article by Gretchen Morgenson in the NYT, falls into the majority... some great work and some really specious arguments.

The central argument is that banks, through their unrealistic demands for ever greater growth, brought this on themselves by leveraging themselves, disregarding risk and recognizing the profits to be made over years or decades instantly. Some of this is very valid criticism. Underwriting guidelines went off the rails and led to, for example, the stated income loan for wage earners (we called these Liar Loans). Further, demand in the market for securitizations and the perceived safety of those securities (they were backed by mortgages... people ALWAYS pay their mortgage) led to pricing substantially below risk. This was classic irrationality, paying far too much for assets worth much less. Now, everyone is so nervous that they don't want to own any but the safest credits, those insured by the government (directly or in the case of Fannie/Freddie, indirectly). 18 months have passed since the markets began to seize up and we're still stuck. Will they come back?

Of course. However, underwriting is going to be a serious concern going forward and pricing is going to go way up. Many companies, for example, are still doing jumbo loans. However, they are being priced as if they are going to remain on the books forever, never to be sold.

Everyone, from banks to borrowers to investors, is to blame for this crisis. However, the reality is that this was, in part, driven by nonexistent wage growth and lack of regulatory compliance. In other words, while the crash was inevitable, it would have been a lot less costly and damaging because the consumer and banks would have been better able to weather the storm. Government, as it turns out, really IS a necessary evil. It's funny how many people who invested in IndyMac are now bitching and moaning because OTS didn't do it's job.

This is a failure of conservative, Reaganite ideology. And now, rationality is making a comeback. Which is why this won't be nearly as bad as everyone seems to think. And for another take on Morgenson, there's this.

Posted by mcblogger at July 23, 2008 09:11 AM

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Well put, friend. You have a good way of making this stuff understandable.

Posted by: WhosPlayin? [TypeKey Profile Page] at July 24, 2008 01:16 AM

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