Saturday, January 17, 2009

What sequence of events caused the mess?

Hedge fund executive Oscar Schafer in a Barron's interview (January 12, 2009, "Hang on Tight!") described our current economic condition thus: "The world is experiencing a giant margin call."  Yes, a giant margin call enabled by easy credit extended to millions of people who couldn't afford a home, or couldn't afford as much home as they purchased.  Many of them then sucked the equity out of these homes to finance a lifestyle they couldn't afford, before defaulting on their mortgages. 

How did it happen?

Barney Frank
It started with policy makers in Washington who wanted to guarantee home ownership for anyone with a pulse. The Fed left open the spigot of cheap money by keeping rates too low for too long and America became intoxicated by illusory home price appreciation. This party was joined by money center moguls trying to juice returns by making big bets upon this whole sorry misuse of credit, until the house of cards collapsed.  Millions of people, who either ought to have remained renters until their income and assets could justify any mortgage, or who should have purchased more modest homes at fixed rates, were enabled by government-coddled institutions like Fannie and Freddie and popular legislation to "invest in our communities".  The risks they took (policy makers, investment banks and millions of fiscally-challenged Americans), have poisoned the well that the rest of us must drink from -- perhaps for decades. Now, we hear that the other shoe to drop will come from commercial credit busts, or the next highest risk level of mortgages above sub prime.  Great.

This all has the same antecedent -- greed. Grandma warned us when we were children.  If you can't afford it -- don't buy it. If you can't afford to lose it -- don't bet it. In short, live within your meansGreed is the same thing that destroyed Rome. With God's grace, we'll get treatment and beat our addiction to debt before we all go down in flames.