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Tuesday, September 25, 2007

Another 70,000 Years In Purgatory

OK, my performance here is not brilliant, indeed, it cannot be fairly characterized even as mediocre. I keep sitting down to write about why Greenspan and Fisher are dead wrong and flaming out in utter rage. If you read this NY Times article (provided by FFDIC over at Calculated Risk) you may understand why.

The difference is between subprime lending and predatory lending. What Fisher is talking about is predatory lending, and if Greenspan really believes that no system of national mortgage regulation is required to deal with it he just doesn't know jack about mortgages. The NY Times article is about predatory lending. The two legal firms trying to get redress for the borrowers deserve a shout-out. They are the Law Foundation for Silicon Valley and Greenberg Traurig, which of course is acting pro bono. The distinctive feature of predatory mortgage lending is that it leaves the borrowers in nothing but their shorts, completely unable to afford legal counsel of their own. Naturally, predatory lenders consider this a benefit rather than a flaw.

I understand very well why the average citizen would not understand the effects of a credit contraction on the general economy and might resort to conspiracy theory as an attempt to make it comprehensible. Judging by history, it's almost the expected result. This Bloomberg article about the effects of commercial paper going blooey upon non-financial paper might explain why and how it happens and how companies that have nothing to do with the world of wacky finance get sideswiped by it. In essence, even if the underlying asset is good, the companies have lost their money until maturity, and now have to resort to emergency financing:
``We have 200 people to keep alive,'' Chief Executive Officer Gordon McCreary said in an interview in Toronto. ``Our lifeline to getting critical materials to the north'' was the C$43.8 million ($43.8 million) invested in commercial paper, he said.

The Canadian cash crunch that started with defaults on subprime mortgages in Southern California and Florida has hurt more than 25 companies that invested in commercial paper, including Sun-Times Media Group Inc. and Canada Post, the nation's mail service. Baffinland has 95 percent of its cash in Canadian commercial paper, debt that is due in 364 days or less.
The diffusion seen in credit contractions is like a financial tsunami, and it has the highly negative property of hitting functional companies the most seriously, because they are the furthest downstream from the money tap. That is why every government so far hit has had to pump massive infusions of cash into the system to prevent a collapse.

Once again the willing participants cast about for a scapegoat. This wasn't a home price appreciation bubble, it was a credit bubble. Commercial paper is part of that credit bubble. The massive increase in housing backed debt was a manifestation of that loose credit and went on exactly as long as loose credit policies continued.

"Canada's asset-backed commercial paper market doubled to C$120 billion since 2000,"

Well dud. Do you think some of that was lousy paper regardless how much "accidentally" ended up contaminated by MBS?
Greenspan does not know jack about Mortgages,he does know what side his bread is buttered on.He take care of his buddies and as far as the rest,they can eat twinkies.Your outrage does you credit,This is Criminal stupidity,but the important question "what can we do to mitigate the damage?".every little bit helps,whether it is a blog,a letter to your representatives,or a conversation with a neighbor.

Due to shortsighted policies, debt was substituted for income to keep consumption going. Consumers had to consume, Colleges and Universities had to keep going, and the Medical folks had to get paid. There was the hard way of restructuring or protecting the US workforces, possibly violating some ideological belief or the easy way of easy but expensive credit. After all you can expand credit at a multiple of income even declining income in real terms, while encouraging workers to keep on consuming. This resulted in the upper classes keeping up their incomes and the lower classes able to consume and for the most part everyone was satisfied.

Had the hard way been taken, then doctors would have had bad debts or declining income, merchants losing sales, universities losing students and there would have been a political outcry to help the US worker.

Of course the debt just put Dooms Day off. Now the risk is that much of the accumulated wealth that flowed to the upper classes will vanish and the hit to their incomes happen all with a mountain of debt impending any recover.
Vader - yes, debt was substituted for income. I really believe that declining real incomes were the motivation for a lot of people taking on way too much debt.

Tom - yes, but first we must understand. Actually, I think Greenspan really didn't understand what he was doing. He was trying to capitalize the undercapitalized in order to compensate for lower incomes, but it was never going to work. I think the man just doesn't know jack about mortgages. I have huge ideological differences with Greenspan in some ways - especially his theory that declining wages are somehow a "virtuous" cycle.

Rob - the funds often commingled in these money markets. The money market managers are the ones who bought the CDOs. Do you know what the money market assets are in your funds? Most CFOs don't.
You touch a sore spot. My Fidelity MMA is short term CP. And that CP? Some of it is to Countrywide. Pissed me off.
Uggh. My sympathies.
Yea, j6p(joe six pack) took on the debt, but he was encouraged by his betters to do so. If you figure our leaders claim the right to high salaries and benefits as the benefits of being leaders, then by example and encouragement they led j6p to debt purgatory. After all day after day, credit card solicitations come in th email, the airwaves are filled with the joys of credit card debt and entire cable channels show folks delighted by house upgrades. j6p sees the advantages to buying stuff on credit -- it is almost patriotic to do so.

At the same time the income available to buy stuff is declining or static.

There are few ads on saving except to folks expecting to spend their retirement on cruise boats, extended vacations or buying a winery.

Frankly j6p did the rational and patriotic thing.
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