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raymondusa (raymondusa)
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Sub-Prime Meltdown explained

Here is a good explanation about the Sub-Prime meltdown.

After 9/11
Bush and Greenspan was afraid of economic problems
Got together and agreed to lower interest rate to stimulate economy
Fractional Reserve meant banks could lend more money than they had
Secondary market were eager to provide liquidity, so more loans were originated
After Dot Com bust, Wall Street looked for a place to park money
A flood of money and liquidity came into the Real Estate market, post Dot Com bust
A whole bunch of newbie loan sharks, er officers, er loan consultant came into the market
Leaders created Option ARM to help more folks buy a home
Effectively turning some marginal borrowers into Prime borrowers
Assumed market appreciation, since that would take care of security and LTV problem
More Sub-Prime loans written with relaxed underwriting, since lender had too much money to lend
Wall Street pushed lenders to create more loans to package and turn them into securities
Newbie loan officer, newbie underwriter, not following prudent underwriting
Disaster waiting to happen, but not surprising

THE ROAD TO SUB-PRIME MELTDOWN BEGINS

Mortgages started to reset
Marginal borrowers started to default, first the Sub-Prime and now Alt-A
Wall Street gets freaked and started pulling back liquidity
Lenders start to see more defaults and they start to freak
Lenders begin to have harder time selling their existing loan portfolio
Fannie Mae and Freddie Mac getting freaked too
Secondary market started to slow easy credit, and began tightening credit
Lenders had tougher time selling existing loans
Buyers sensed a tightening of credit
Media continued talking about Sub-prime this and that, and emotions were running high
Buyers sensed more uncertain future ahead, and began to sit on the sidelines, waiting and watching
Loan volumes of some lenders dropped off by 85% year to date
Freak conservative lenders overreact and started eliminating loan programs left and right
Buyers have a harder time finding a loan
More media bad news freaked the buyers some more
Sub-Prime problems cascade to other loan segments
Beginning to see it affect suppliers, contractors, material haulers, etc
Wall Street cutting off liquidity and easy credit
Banks over tighten underwriting, strangling off loan volume
Buyers still freaked and on the sidelines
Lenders have greater difficulty selling existing loans to secondary market

What you see is almost the mirror opposite. The first part is expansion in every way – buyers, sellers, lenders, easy credit, easy underwriting, plenty of Wall Street money, plenty of secondary market liquidity, low interest, plenty of liquidity from the Fed, and a fractional reserve system that exaggerates the expansion.

What you see in the second part, is sparked initially by mortgage resets, and defaults, as this reverses the expansion into a contraction cycle - freaked buyers, sellers, lenders, credit crunch, tight underwriting, Wall Street liquidity drying up, Secondary market liquidity slowing and tightening, some liquidity from the Fed, and the same fractional reserve system that exaggerates the contraction.

You can say we are in a market correction cycle, since the expansion cycle was exaggerated, and now the contraction cycle is exaggerated, as the market struggles to get back to a reasonably normal cycle.

[ Last edited by raymondusa at 2007-8-13 09:36 PM ]

2007-8-14 01:31 PM

greendragon
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Well, if Uncle Sam prints enough money...

...and this time, spends it on domestic consumption...

markets will be have liquidity again. Then with low interest rate regime (USA has no choice, what with US$8 trillion in government loans) and so much more in external debts. The money masters at New York and then London will then have a relook into the financial system to find ways to invest the extra liquidity.

or would the script be so simple this time round?

Game has changed dramatically in the last 7 years!

Green Dragon

2007-8-14 01:56 PM

greendragon
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The world has changed so much....

....Russians now are looking into "soft power" and increasing trade!

Chinese people are a economic force to be reckon with, and still gobbling lots of commodity.
and this has revived the fortunes of the British Club who now is flooded with liquidity and increased power as a established financial network.
France is looking to maintain its status as the fifth largest power in the world. It has to look to strengthen its African francophile regions and finds ways to reduce Chinese encroachment onto it's neighbourhood.
Amerikans is doing a lot of "reinvention" as their nation's infratructure is weak, it's overstretched its military-industrial complex.
Arabs, Russians, Central Asians, Venezeulans is relishing their power with crude oil...

It's a whole new ballgame!

Even Mr. Rove has resigned, he doesn't know how to play the NEW GEOPOLITICAL GAME!

Green Dragon
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2007-8-14 02:01 PM

caringhk (O Sweetie&Me go laojia. ..)
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QUOTE:

Originally posted by raymondusa at 2007-8-14 13:31
Here is a good explanation about the Sub-Prime meltdown.

After 9/11
Bush and Greenspan was afraid of economic problems
Got together and agreed to lower interest rate to stimulate economy
Fra ...

was it Banerke trying/testing out Greenspan low interest theory???

2007-8-14 02:10 PM

cestmoi (cestmoi)
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Hedged sub-prime - part 1

Raymond, I don't think "meltdown" is an appropriate word, it is on the "alarmist" side. Sub-prime is about 1% of the total value of the mortgage market in USofA. Let's not fan for fire where you see smoke.

How is sub-prime different and are there any advantages to it? First, let's see what a traditional loan would look like.

The current sub-prime perturbation through the global financial system is out of proportion to its total market share. Two human factors here: greed vs fear and fear is winning out.

Federal Reserves Chairman Benanke suggested that the write down of the asset books would be around 1% of total US mortgages, and gave us an elastic figure of between US$50 billion to US$100 billion. As said, 1% of total mortgages and we see a knock-on effect that caused the pull backs in major stock exchanges world wide worth more than the subprime market!

Traditional lenders of mortgages by and large works like this:

[ Last edited by cestmoi at 2007-8-15 06:56 PM ]

Image Attachment: Traditional Prime.jpg (2007-8-15 06:45 PM, 11.58 K)

2007-8-15 06:45 PM

cestmoi (cestmoi)
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Hedged, sub-prime market - Part 2

Now let's look at the hedged, sub-prime market and see how it differs from the traditional lending.

Hedged, sub-prime make good sense in theory:

* But look what has just happened: the bank has transferred part of the default risks to the 2nd and 3rd tier investors - spreading the risk is in theory a good thing.

There are disadvantages of hedged, sub-prime market:

Hedged Sub Prime.jpg

2007-8-15 06:54 PM

raymondusa (raymondusa)
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cestmoi:

I think for the most part we agree.  Sub-Prime is really a relatively small part of the total mortgage market.  If calculated by annual origination, I’ve seen numbers as high as 10% for Sub-prime, with Prime and Alt-A making up the rest.  Of those numbers, about 9-15% of Sub-Prime is in default, and with more resets coming, that number may rise.  Overall, if we were only talking about Sub-prime losses, then I agree it is a very small number, relatively speaking.

But when you add a second layer, the Hedge Funds, multi-tiered leverage, and opaque operations, people are understandably scared, and start being irrational.  The Funds were supposes to spread risks, kind of like insurance companies using reinsurance companies to help underwrite a huge insurable risk, and spreading that risk among many different companies, so in the event of a catastrophic loss, no one company must bear that huge risk alone.  But because of greed, some of these Hedge Funds were not just about spreading risk, but taking more leveraged risks to make more money.  Think of it from the Fund manager’s perspective.  Leverage up, and if you bet right, you make huge money.  Bet wrong, and you lose investor’s money.  The Fund manager wins either way, as greed propelled them to take more and more risks.  The Fund manager is gambling using quantitative models, when they should be investing by assessing fundamentals of the assets.  Because of the opaqueness, and multi-tiered leveraging, you have unknown risks, which creates more fear.  Recently, a French bank admitted as much.

When I say “Meltdown”, I was not referring to the relatively small losses from defaulted Sub-Prime loans.  I was referring to all the ensuing losses coming from fear and irrational reactions, subsequent to these Sub-Prime losses.  There is a saying that I think is apropos for this situation:  “Sometimes, what well meaning people think is a cure is actually worse than the original disease”.  The original losses that created this fear and irrational environment, was actually small, in comparison to the total volume of mortgages outstanding.  But almost every single participant from the Sub-Prime borrower, on down, reacted with fear and took some degree of irrational action.  From Wall Street pulling back liquidity, to lenders over tightening underwriting, dropping loan programs left and right, to Fannie and Freddie not moving faster to provide needed liquidity, to the Fed’s slow reaction to provide liquidity, to the Media blowing up the fear, to banks not being up front and honest about their risk exposure, which only created more uncertainty and lost of goodwill and trust, to Hedge Funds not fully disclosing their risk exposure, this created a culture of fear, which only magnified the irrational exuberance!  You mix that with the unchecked and opaque greed of the Fund managers, and you have a disaster, since the market participants all down the line, from lenders, underwriters, secondary market people, fund managers, who some perhaps were well meaning and wanted to cure this problem, but only made things many times worse.  Had all the people dealt with this small original problem quickly, clearly, openly, honestly and transparently, and fix it at the root, I think the general public would not have freaked, and the media would not have tried to make a sensational story out of nothing to fan the flames of fear.  But the age-old story, that of fear and greed, made a small problem, into what it is today – an ensuing meltdown of things directly, even indirectly related to Sub-Prime.  The lesson is: Fix small problems quickly at the root, since these types of problems do not fix itself with time, or get better with time.

2007-8-16 02:08 PM

cestmoi (cestmoi)
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Hedged, sub-prime market - Part 3

Let's recap on what we found out so far:

What's going to happen next?

It won't blow over soon. This is driven by with irrational fear. That and the fact that some people want to see a bit of volatility in the market, it would likely get worse before it gets better.

Bear in mind only 1% of total mortgages, or between US$50 billion to US$100 billion, have been identified as distressed or in default. Mortgagees on a low honey-moon rate will soon have to pay the full rate, putting more stress on their finances; lenders' risk premiums on various financial assets rise; and start affecting the wider economy and the weakening USofA economy add to the mortgage defaults.

I think there will be more delinquency and lenders will continue to tighten credit, leading to a liquidity problem.The Fed will be faced with the choices:

I personally call that the "financial transistor effect", where a very small current can control a much larger one, or even lead to an avalanche.

Global stock exchanges have lost more than what the small sub-prime market is worth.

2007-8-16 06:37 PM

cestmoi (cestmoi)
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Hedged, sub-prime market - Part 3.1

What's going to happen next?

It won't blow over soon. This is driven by irrational fear. That and the fact that some people want to see a bit of volatility in the market, it would likely get worse before it gets better.

Bear in mind only 1% of total American mortgages, or between US$50 billion to US$100 billion, have been identified as distressed or in default. Mortgagees on a low honey-moon rate will soon have to pay the full rate, putting more stress on their finances; lenders' risk premiums on various financial assets rise; and start affecting the wider economy and the weakening USofA economy add to the mortgage defaults.

I think there will be more delinquency and lenders will continue to tighten credit, leading to a liquidity problem. Countrywide has come clean and said it will according to Fannie and Freddie standards.

Spooked investors have been reassessing the risks and have been pulling out their monies from what they perceive as risky investments.

PBoC, heads up: they would now be putting them into the government bond market.

Chairman, attention: new home construction in USofA has dived to a 10-year low in July and Countrywide Financial tapped an US$11 billion line of credit to stabilise its finances while its share price was down by another 16%, after falling 13% Wednesday on NYSE. Its shares has junk status.

Web Links
http://www.nytimes.com/2007/08/1 ... r=1&oref=slogin

2007-8-17 08:16 AM

raymondusa (raymondusa)
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cestmoi:

We are beginning to see it spread to Alt-A.  These hybrid loans were written with a initial low teaser rate to help more folks qualify, who were otherwise marginal or not qualified borrowers. The low teaser rates typically were for one to three years, and then it resets to the fully indexed rate.  The folks in trouble are facing the same two problems – capacity and collateral, another words, ability and security.  How it is affecting Alt-A is in the collateral side.  For example, a borrower may have gotten a 90% LTV Alt-A loan.  With the current market problems, many markets have seen real estate prices go down, so if you are a lender, you are understandably concern because you are seeing your collateral getting less and less secure.  Some markets have experienced more than a 10% drop in price, so if a lender loaned 90% LTV, that lender has no collateral right now.

Bernanke is understating this loan problem when he quotes 1% (he’s only talking about defaults in Sub-Prime).  I wouldn’t put too much weight on his opinion, since he is the same guy that sat and did nothing for weeks, as the problem fester and grew.  These hybrid loans are not only in Sub-Prime, but also used in Prime, Alt-A, and even Commercial loans.  As wave after wave of resets continue, no one truly knows how big this problem is, because many resets haven’t taken place yet.

It is affecting the wider economy.  Real estate is the second largest economic sector behind health care.  When there are problems in this sector, it takes many other industries with it. I was in my local Home Depot the other day, and it was like a ghost town.  There are layoffs in banks, title companies, and inspection companies.  Even material suppliers are feeling it.  I spoke with a sheetrock contractor, and he told me orders are down 80% compared to two years ago.  You have many people paralyzed with fear, so the expansion engine, has come full circle, as we are clearly in a constriction cycle.

While many people are getting hurt, I feel long-term that this market correction is good, because it eliminates the bad lenders, the bad practices, the easy underwriting, and bring back good common sense underwriting, professionalism, and experienced people who know what they are doing.  We had too many newbies entering the real estate market that truly didn’t know what they were doing, but was only there to make a fast buck during the exaggerated expansion cycle.  This market correction to get back to a normal cycle is good.

The best example of exaggerated irrational fear, is global stock markets have lost many times more in equity just reacting to Sub-Prime losses.  Is the reaction to cure worse than the disease? I feel for the astute investor, the current problem is a future buying opportunity, as the astute investor is buying because of strong fundamentals, not quantitative models, so the irrational hammer driving down the price, just means more bargains are coming.

2007-8-17 10:26 AM

#10

greendragon
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Whatever it is, this will mean "CREDIT SQUEEZE"...

..for the next few months.

Green Dragon
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2007-8-17 12:57 PM

#11

cestmoi (cestmoi)
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Federal Reserve cuts discount rate

QUOTE:

Originally posted by raymondusa at 2007-8-17 10:26
It is affecting the wider economy ...

The American "discount rate" is the rate at which the Federal Reserve Bank lends directly to commercial banks. The fed cut that by 0.5% today, which is unusual because normally the Americans announce a cut (or an increase) only after a scheduled meeting of the heads of reserve banks.

The stock market reacted well to it, but would it solve the problem of bad lending practices; inadequate risk management and reporting procedures; and more transparency in the risk exposures of the funds? I doubt that. It seems more like a band aid solution in that particular respect. Perhaps RaymondUSA has a point, let the market weed out those institutions with bad lending practices. Excerpt from NYTimes.com follows

QUOTE:

...
In the midst of the crisis, the federal funds rate spiked to a level above 6 percent.

Cutting it will inevitably raise the charge that the Fed is bailing out hedge funds and others who borrowed billions of dollars to invest in subprime mortgages, ignoring the risk that many of the low-income households who got these mortgages would default.

Lower interest rates raise the odds that risk takers can sell bad investments with less of a loss.

“You would be mitigating their problems,” said Alan Blinder, a Princeton University economist and a former Fed governor, but “I would count that as a social cost of saving the economy.”

What remains unclear is how much damage, if any, the economy has suffered from the market turmoil. The Fed promised “to act as needed to mitigate the adverse effects,” but data documenting any damage takes weeks to collect.

Home construction is clearly down, and recent economic reports show that consumption has weakened since the first quarter.
...
Web Links
http://www.nytimes.com/2007/08/1 ... Boi5PtWPi9xt7aq257g

But it did send a strong signal to the stock market that the Fed will step in. So they chose the first two solutions I listed! No surprise there. Now let's wait for the reports on the inflationary impact of that 0.5% cut.

As far as China is concerned, let's look at what went wrong there.

Greendragon, wrong call this time! ECB and the Fed pumped monies into the economies and are now lowering rates because this thing is affecting the wider economy, globally.

2007-8-18 06:28 PM

#12

cestmoi (cestmoi)
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Federal Reserve cuts discount rate

QUOTE:

Originally posted by raymondusa at 2007-8-17 10:26
It is affecting the wider economy...

QUOTE:

2007-8-18 06:34 PM

#13

raymondusa (raymondusa)
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The Fed lowering the “Discount Rate” doesn’t truly have a direct impact on mortgages.  This is really more of a psychological effect, a message to Wall Street, to provide some calm within the storm, that the Fed is mindful of their concerns.

Bush has a very difficult dilemma.  If he asked the Congress to authorize some form of bailout, or have the Federal government agencies indemnify these loans losses, provide more liquidity with government backing, loosen the secondary market limits, or some combination of the above to loosen liquidity and easy the credit crunch, it would go a long way to calm the fears from Wall Street to Main Street.  But that is like rewarding the problem child for bad deeds, and always coming to the rescue with the “Get out of Jail” card.

Some on Main Street are clearly hurt, and more will get hurt, and they had nothing directly or indirectly to do with these bad deeds.  The question for Bush, Congress, and the Fed is:  How far do you punish those who did the bad deeds, if it means hurting some on Main Street too?

This is like the antibiotic argument.  Just like some antibiotics will kill off some bad bacteria, it will also kill off some good bacteria too!  Not an overwhelmingly great choice!

Seems to me that Bush, Congress, and the Fed had three choices from the beginning:

1. Do nothing, and let Wall Street, Main Street, and World Global markets sort itself out (the self-cleansing to rid the market of the bad seeds).

2. Take massive action early, including but not limited to the actions above, to restore confidence from Wall Street to Main Street, fully knowing this will reward some bad seeds who did the bad deeds.  This was a choice at the beginning of the Sub-Prime problems, but it is really not a choice now (The horses are already out of the barn, so it’s too late to close the barn door now).

3. Allow Wall Street and Main Street to feel some pain, to send a message.  Delay any corrective actions so people remember the pain, which will sent up a more compliant environment for future legislative actions to increase regulations on all the participants, from the borrowers, lenders, underwriters, secondary market, hedge fund managers, investors, speculators, etc.  The corrective actions described above, will cost US a lot of money.  We may not see the direct impact in terms of increased taxes, but we will see the indirect impact, by way of increased regulations, increased debts, and increased inflation.

My take:

Choice 2 is no longer an option.  Choice 1 is just too costly for everyone.  The most real world, practical, and sensible choice is 3.  That’s where we are headed folks!

2007-8-20 07:22 AM

#14

cestmoi (cestmoi)
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Containing the damages

The knock-on effect has done a lot of damages, I think we agreed that many global stock markets lost values more than what the sub-prime market is worth.

My agenda is to contain the spread of damages and when the Fed lowered the discount rate, it sent the exactly right message. As for punishing those non-bank institutions for their lax lending practices, let them stew a bit longer. Yes, sure there will be pain, but hopefull it will also be a financial carthasis that cleanse the non-bank lenders.

I think we have just about exhausted this subject unless, going forward, you would like to tell us what you would do differently.

2007-8-20 06:35 PM

#15

cestmoi (cestmoi)
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Short term US treasury bonds heading north...

As I have said earlier, there will be a rush to security, and a rush to security is a rush to the government bond market. People will snap up whatever treasury bonds they can lay their hands on. According to NYTimes.com, "the return on a three-month United States Treasury bill was 3.09 percent when trading closed yesterday. At the end of July, it was nearly 5 percent..."

China has a lot of treasury bills, they should be worth a few dollars more now.

The article from NYTimes.com:

QUOTE:

Stocks & Bonds
Skittish Investors Rush to Buy Treasury Debt
By JEREMY W. PETERS
Published: August 21, 2007

The stock market was quiet yesterday, but debt markets were anything but.

In a sign that investors are fleeing investments that carry even the slightest hint of risk, the price of short-term government debt soared, sending yields on their biggest drop since the stock market crash of 1987. The return on a three-month United States Treasury bill was 3.09 percent when trading closed yesterday. At the end of July, it was nearly 5 percent.

The rush to buy Treasuries offered an indication that the Federal Reserve, which on Friday unexpectedly reduced its rate for loans to banks, might need to do more to reassure investors about the credit markets.
...
“There’s just a massive fear factor at play here,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.

“Investors of every variety are just scrambling into the safety of Treasuries.”
...
Many companies have found it difficult to raise money by selling commercial paper. These markets began seizing up once it became known that some of the debt was backed by risky subprime mortgage loans.
...
“You’re seeing a lot of people scrambling to raise cash,” said Robert F. Millikan, director of fixed income at BB&T Asset Management in Raleigh, N.C. “Nobody can actually quantify the risk right now (Cestmoi: who and to what amount of risk, that is now opaque), so investors are requiring a somewhat exaggerated level of compensation.”
...
The yield on 30-day commercial paper that is backed by pools of assets like home loans and credit cards rose to 6 percent yesterday from 5.28 percent in mid-July, according to data from Bloomberg. Typically, the yield is close to the federal funds rate, which is 5.25 percent.
...
Web Links
http://www.nytimes.com/2007/08/2 ... ;hp&oref=slogin

And from Reuters, more or less the same message:

QUOTE:

UPDATE 2-U.S. Treasury bills rally, credit fears return
Mon Aug 20, 2007 6:22PM EDT
By Richard Leong

NEW YORK, Aug 20 (Reuters) - U.S. Treasury bills rallied on Monday, with the three-month yield posting its biggest one-day drop since the stock market crash of 1987, as investors sought shelter in the safest of government securities.

Professional investors who manage portfolios ranging from plain-vanilla money market funds to high-risk portfolios with exotic strategies, dumped risky assets and socked money into ultra short-dated U.S. government securities, analysts said.

"It's very abrupt and disorienting," said Lou Crandall, chief economist at Wrightson ICAP in New York.

After being in record territory for most of the day, the three-month T-bill <US3MT=RR> yield ended at 3.27 percent, down 44 basis points from late Friday. Earlier, it fell 126 basis points, doubling its largest one-day decline in October 1987, according to Reuters data.
...
Web Links
http://www.reuters.com/article/m ... ?rpc=44&sp=true

I hope you guys made some money out of it.

2007-8-21 01:36 PM

#16

raymondusa (raymondusa)
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Here's a pretty article by Dr. Mark Shousen

Who's To Blame For the Real Estate Meltdown?

Last week, AOL polled its readers to place the blame on the mortgage meltdown that has brought Wall Street to its knees. According to the poll, 55% of subscribers blamed the banks, 17% blamed the homeowners, 15% blamed investors, and only 13% blamed the Federal government.

To understand the real culprit for this "market failure," I am reminded of an old parable in the Bible…

In the parable of the wheat and the tares (Matthew 13:24-30), Jesus tells the story of a wheat farmer whose crop comes under attack by an unknown assailant. In the middle of the night this enemy sows tares (weeds) in his wheat fields.

Soon the farmer’s servants discover that the farmer’s crop appears to be twice the normal size. Yet the master realizes that half the crop is fake – weeds instead of wheat. But he warns his servants not to tear out the weeds for fear of uprooting the good shoots; they must wait and let the wheat and the tares grow up together until harvest time.

Months later, the wheat produces good grain, while the tares are merely weeds and provide no fruit. The servants pull out the weeds and burn them, and store the grain in the barn.

The parable is imminently applicable to the recent wild ride on Wall Street…

Real vs. Artificial Growth

In today’s robust global economy, the wheat represents genuine prosperity – the new products, technologies, and productivity generated by capitalists and entrepreneurs. It represents real economic growth, and when harvested, reflects a true higher standard of living for everyone. Under such conditions, stock prices are likely to rise.

On the other hand, the tares represent artificial prosperity that bears no fruit in the end and must be burned at harvest time. Where does this artificial growth come from? The central bank’s "easy money" policies! The Fed artificially lowers interest rates and creates new money out of thin air (through open-market operations).

This new money, like regular savings, is invested in the economy and stimulates more growth and higher stock prices – higher than sustainable over the long run.

Since the 9/11 terrorist attacks, investors put most of the new money in real estate, and the banks and financial institutions encouraged them with their easy terms.

Who is Today's Financial Devil?

Who is the enemy who sows artificial prosperity in real estate and stocks? Alan Greenspan. (Or, to be more accurate, the Fed and central bankers.)

Starting in 2002, Greenspan & Co. aggressively expanded the money supply and lowered interest rates far below the normal market. Greenspan himself admitted (wrongly, it turned out) that he feared that the U.S. would go the way of deflationary Japan. His Fed gradually cut rates to 1% by 2003.

Not surprisingly, the new money went into risky mortgages. The banks and investment companies found it extremely profitable to encourage profligate homebuyers to buy bigger and bigger homes with little down and less financial background checks.

As Greenspan & Co. lowered the Fed Funds Target Rate from 6% to 1%, banks borrowed cheaply from the Fed window, and invested in risky mortgages. The subprime mortgage market took off like a rocket, from 2% to 14% of all mortgages over a five-year period (2000-2005). In 2003, the year of the great money flood, when the Fed cut rates to only 1%, the subprime lending went from 4% of total lending to more than 10%. That’s in one year!

But there is no free lunch, as sound economists have warned repeatedly. At some point, the harvest time comes and the wheat must be separated from the tares. This is the crisis stage, where the boom turns into the bust. Now it’s harvest time, and we are weeping the effects of the Greenspan era.

The Greenspan Blunder

On August 7, The Wall Street Journal did a major front-page story on "How Credit Got So Easy And Why It's Tightening." The authors quoted Greenspan saying in 2003/04: "I don't know what it is, but we're doing some damage because this is not the way credit markets should operate."

Moreover, at the time, Greenspan brushed off an idea to boost scrutiny of subprime mortgage lenders. A former Fed governor told The Wall Street Journal that he proposed to Greenspan in or around 2000 that the Fed should start sending examiners into the offices of consumer-finance lenders that were units of Fed-regulated banks. But the Fed official said, "He [Greenspan] was opposed to it, so I didn't really pursue it."

The lesson is clear: There is no market failure here. The collapse in the subprime lending market and the subsequent credit squeeze can be laid at the feet of our Fed officials, primarily Alan Greenspan, the so-called "maestro." And now we are paying the price.

Only the Fed can extricate out of this mess, and not surprisingly, it is working in concert with the other central banks to inject massive liquidity to bail out the banking system. But it hasn’t been enough to forestall a financial crisis. Last Friday, it wisely cut the Discount Rate by half a percentage point, but it will probably need to do more before the credit and stock markets show a solid recovery.
When will we learn? Globalization and supply-side, free-market policies have justified genuine economic growth and higher stock prices over the past two decades. But "easy money" policies have at the same time created an artificial boom and "irrational exuberance" on Main Street and Wall Street.

Ignore this lesson at your own peril. Remember the parable of the wheat and the tares.

2007-8-21 03:00 PM

#17

raymondusa (raymondusa)
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oop! typo

I meant to say:

Here's a pretty good article by Dr. Mark Shousen

And a pretty interest graph too!

2007-8-21 03:30 PM

#18

raymondusa (raymondusa)
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oop! typo

I meant to say:

Here's a pretty good article by Dr. Mark Shousen

And a pretty interesting graph too!

Image Attachment: 20070820_IU.jpg (2007-8-21 03:31 PM, 27.34 K)

2007-8-21 03:31 PM

#19

cestmoi (cestmoi)
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Is this a 2-way conversation?

In which case: Matthew tends to embellish Mark, as do John and Luke. Judas is the only apostle I'll take with me to the market.

2007-8-21 06:52 PM

#20

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