Tuesday, June 12, 2007

The Second Wave of Subprime Victims

I've been complaining on behalf of those innocent borrowers, now foreclosed upon, whom the mortgage industry has chewed up and spit out as a result of the recent turmoil in the housing industry. My fury has always been directed at the "buck stops here" top of the line, which is the US Federal Reserve and the other central banks of this world who have been pumping damaging excess liquidity into the system, under the mistaken impression that they are "controlling" prices and employment. (More on that later when I attack Fed Governor Frederic S. Mishkin for some really stupid and conflicting statements.)

Now we have the second wave of victims: Those who bought the securities that funded the housing boom. (For a good explanation of the transactions behind the issuance of these securities, see my Prudent Bear article.)

Some of these buyers of bonds are ordinary Joes and Janes and pension managers who are now looking for a scapegoat. "It's those nasty big banks who put the bond packages together," they are yelling in unison, in the hopes that Congress will "do something about it." Everybody hates the Big Bad Banks. (See this Bloomberg article by Christine Richard.)

This crying-to-papa is a very dangerous trend. This is how Big Government pulls your heart strings and gets you to vote for more regulation of industry, which regulations actually are counterproductive. They eliminate competition by squashing the smaller players in any given industrial field and create monoliths like Bear Stearns, JP Morgan Chase, Credit Suisse and Morgan Stanley.

Jackals & Impala
[Thanks to safaritaxidermy.co.za for the image.]

That said, most of the damage done in the subprime market was done by players who are outside of the Fed's jurisdiction. Please keep in mind that the banks and mortgage companies are just the jackals of this world doing what comes naturally: eating up the weak. The Big Bad Wolf in Sheep's Clothing is the Government itself through its collaborator, the Federal Reserve. It is they who proclaim to the world that they are in control of inflation (Mishkin uses the catchy erudite-economist-sounding phrase "nominal anchor." I'll address this speech soon.) It is they who say that this is not a housing bubble caused by their own loose monetary policy. (See my post back in September of 2006 when their researchers declared just that.) It is they who deny any and all responsibility for the damages now being suffered by the little people. And it is they who stand by and watch the massacre while continuing to deny their hand in it.

A pox on 'em.

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