Thursday, May 17, 2007

The Mortgage Bust: Is Wall Street the Problem?

Brian Louis over at Bloomberg tells us:

"Ohio Attorney General Marc Dann said on May 15 that he wants to sue Wall Street firms because their bond sales enabled consumers to get mortgages they couldn't afford." (Source.)

Mr. Dann is trying to find a scapegoat, when what he needs is a culprit. Wall Street is just doing what Wall Street does. It smells money and finds something to buy with it.

What Mr. Dann needs to research is the source of that housing bubble money. And by the way, now that the housing market has been capped off by higher rates and repressed by a snooping regulatory government, that money has already found a new avenue of distribution. It is now feeding into banking operations like leveraged buy-outs and mergers and acquisitions, where it is doing just as much damage as it did to real estate.

Perhaps all of this cash is really nothing more than Bernanke's global "savings glut;" but what the world seems not to be wanting to see are the forces of monetary expansion that have been at work since 2000 and even earlier.

The US began arbitrarily augmenting the stock of purchasing media in 2001 and only partially slowed it down a year ago. Japan has been doing it since their stock market crash in the 1990's and hasn't slowed down a bit -- indeed the contrary. China is still stockpiling dollars to prevent disequilibrium in their own economy and to keep their own currency from falling, and in spite of US and world pressure they have only slightly modified their attitude.

These are the major players that Mr. Dann should accuse. Why? Because all of this excess credit and monetary expansion in the global economy must alight somewhere. Where? Well, all over, but mainly here of course, in the land of the tallest dwarf.

What damage does this do? It blows bubbles in all the economic sectors where it touches down. Since the 1990's, it started with the dot com. Then picking itself up after the 2000 burst, it moved like a a hurricane through real estate. Now that that market can't take anymore, the hot air has now overflowed into corporate finance to see what mischief it can create over there.

Can this go on indefinitely? Well, I'll have to say maybe; but this will depend on our staying power as the tallest dwarf. We have very few competitors, and we are still the most free economic market in the world, so we may get lucky. Then again, other alternatives exist, most notably things outside the dwarf community's currencies. One of these is gold, an age-old monetary safe haven in times of trouble.

What will be the ultimate effect on us? For as long as the availability of excess liquidity has not been eliminated from the system, it will reinforce our addiction to foreign sources of capital, to the pleasures and pains of excess consumption, and to the absence of the need for domestic saving. Too much of a good thing can be fatal. Look at good things like wine, food, credit -- why, even water in excess can kill you.

In economics, the bingeing spirit turns us all into speculators, i.e. unwary creatures living like La Fontaine's proverbial grasshopper. (Read the translated and original La Fontaine fable called "La Cigale et la Fourmi" here. The translation for "cigale" is actually "cicada," but for some reason the English version of the fable prefers to give the grasshopper the bad reputation.)

Cigale et la fourmi - Cicada or grasshopper and the ant
[Thanks to and to Ivan Lammerant for this illustration.]

So Mr. Dann, and all you attorneys-general who are looking for a scapegoat: Leave a John Doe in your lawsuit for the US Fed and for some of the other central bankers of this world who have unnecessarily and dangerously pumped up the global economy with liquidity that we all drink up and celebrate with no regard for tomorrow. (Oh, now I've mixed metaphors. You can't drink bubbles. Maybe I should say we're hyperventilating. Too much oxygen can kill you, too.)

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