Saturday, December 15, 2007

Dancing Hippos - Inflation and Subprime Cleanup

The "unforeseeable" crash in the sub-prime market has resulted in central banks around the world both lowering their lending rates, and to agreeing to co-ordinated activity to ensure the credit markets don't freeze up again.

Unfortunately, while necessary, this has all the hallmarks of weening the alcoholic off the juice, by just letting them have a little bit more to limit the potential for the D.T.s

I still don't understand how most of these large banks got caught up in the lending to extreme value-to-loan ratios that characterizes the end of many mortgage lending cycles. Were ALL the CEO's drunk? Can they not figure out what lending at low rates for long periods of time does for real estate prices? Do they not read? Are they completely ignorant of both Econ 101 and history? Can they not predict a cause and effect scenario for real estate values? Are they stupid? Unable to think for themselves?

Keeping Fed Rates at 2% or below, as was done from Nov 6, 2001 to Dec 14, 2004 for over three years, is unprecedented in the past fifty years. In the late 1950's and early 1960's, there were three periods where the Fed Rate was 2% or under, but none of these periods exceeded 9 months in duration. (See for yourself).

A simple scaling-back of loan-to-value ratios as rates began to rise - and in response to the booming real estate price increases - would have both protected the banks capital and balance sheet and, as a group, protected society from this mess. Instead, we're all destined to pay for this fiasco, surely through higher inflation rates, if not in other ways.

Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: for additional articles and exclusive content!

Ultimately, the unwinding of the party of these drunken sailors will have implications on nascent inflation, something that'll probably take even longer to unwind than the couple of years the credit market will be in the sick bed for. One of these two "dancing hippos" may well cause further damage as they twirl about the room with abandon.

Aside from Greenspan, there are many others implicit in this whole mess, including a lot of people who should know better. Maybe Citigroup et. al. needs to open its own form of McDonalds "Hamburger University". Credit Markets 101.

Merry Christmas - bah humbug!


The Confused Capitalist

1 comment:

Deborah said...

I think the CEO's were going for their bonus. Unfortunately bonus is structured for today rather than the long term...