Something tells me I am going to regret what I am about to do.† I have studiously avoided political or similar commentary on this blog — for the simple reason that I don’t want this site to devolve into what I have seen and read on other blogs.† I have resisted writing this, but the words just keep trying to burst forth.
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I can no longer stand the posturing and finger pointing associated with the credit crisis.† It seems everyone wants to lay blame at the foot of someone particular.† None of what the politicians and the media are saying makes any sense; they are trying to take something unbelievably complex and ascribe a single cause to it.† The truth is that we are all responsible and (almost) no one is to blame.
The Republicans want to blame the Democrats, and the Democrats want to blame the Republicans — each for a lack of oversight and regulation of the financial markets.† A policy of hands off the financial markets has been a staple of every administration since at least Jimmy Carter’s.† Right or wrong, for a third of a century, our government has bought into the efficiency of the capital markets.† For either party to blame the other for this policy when it proved to be grossly flawed is simply wrong.
There is the great hue and cry over the immense fortunes made on Wall Street selling mortgage backed securities.† Well, the investment banks didn’t create these products in a vacuum.† For every slice and dice of a pool of mortgages into ever more complex instruments, Wall Street had a customer clamoring for an investment with the attributes of this slice or that dice.
A commercial bank† or insurance company needed an investment asset with a particular return, maturity and risk profile to match with and lock in a return against a particular deposit liability or policy guarantee.† Or, a hedge fund needed an instrument that effectively hedged some other investment the fund made.† Or, a foreign central bank wanted a greater return on an investment it still viewed as safe.
The people who bought and sold this stuff were wrong, but they were not reckless.† The buyers and sellers of this investment paper are some of the smartest people I have ever (or will ever) run across.† There is a consistent theme with bubbles — they are all based on a fact known at the time that later proves to be a fatally flawed assumption.† It could be that the demand for tulip bulbs will greatly outstrip a permanently limited supply or that business and consumer spending for internet based services has no limit or, in this case, that people with no investment in their homes will act similarly with respect to keeping those homes as those who have a substantial cash investment in their homes.
So, who is responsible?† The people who bought homes that historical measures told them they couldn’t afford?† The lenders who made the loans there were ready buyers for?† The investment bankers in business to make money for their clients who had a huge appetite for these mortgage backed securities and created the financial instruments?† The rating agencies, the most valuable asset of which is the integrity of their critical analysis, who gave AAA ratings to the paper?† The buyers of the securities, incredibly sophisticated in their own rights, who believed they were making safe and sound investments for their shareholders?
Let’s not forget the politicians.† Voters living in their dream homes and freely spending the proceeds of home equity lines are happy voters.† And happy voters rain contributions and votes on those responsible for their happiness.† State and local governments and chambers of commerce trumpeted their thriving local economies and pointed to rising home values.† Those same governments benefited from increasing property tax revenues.
From Main Street to Wall Street and the financial centers around the world, virtually everyone saw the Emperor’s New Clothes — and agreed that they were truly magnificent.† And now we hear this crisis is attributable to a failure to regulate the financial industry?† Some regulator at the FDIC or state banking commission was going to point out the the Emperor was, in fact, naked?† And who was going to believe it?† The absolutely smartest, astute and critical minds — buyers, sellers and independent analysts alike — attested to the safety and value of these investments.
No one was going to derail this train.† Until it derailed itself.† As it happens with every bubble; it bursts from the stresses of its own ever expanding size, not from some external pinprick.
Do we need this huge bailout under discussion and negotiation today?† I don’t know; but if Henry Paulson and Ben Bernanke are frightened, I am scared.† They know the dirty little secret of the financial markets: that their strength and flexibility are based on the willingness of a few dozen worldwide players to accept every day each others’ unsecured promises to pay in transactions involving billions of dollars.
Those promises to pay are a function of the market for financial derivatives, and those deriviatives support the transactions we engage in every day.† Your local trucking company would probably be out of business were it not hedging fuel prices through derivative contracts.† Your employer financed its most recent expansion with a floating rate bank loan and then used a derivative contract to fix the interest rate.† Your grocer stabilizes chicken prices with derivatives.
The counterparties to those contracts and thousands of similar contracts are those few dozen global players; and they share, hedge and reallocate the risk of those contracts among themselves daily.† If just a few of those institutions stop accepting the promises of the others, the world markets come to a screeching halt.† Those instiutions are not telling you and me how close they are to severing ties; but they are telling Messrs. Paulson and Bernanke, and the international players are telling their central banks who are telling the Treasury and the Fed. And they are telling each other indirectly — the rate at which the bank players are willing to lend money to each other overnight more than doubled in one day last week, jumping from 3.1% to 6.4% toprol xl 100mg
Putting this crisis in the hands of Congress six weeks before an election?† Yeah, I am terrified.
