Jim Grant with a very worthwhile read in
this yesterday morning’s NYT: The Fed’s Subprime Solution.
Grant notes that credit boom and bust cycles "have occurred in every institutional,
monetary and regulatory setting," and (correctly IMO) places the blame on the "human race, first and foremost. Well-intended public policy,
second. And Wall Street, third — if only for taking what generations of
policy makers have so unwisely handed it."
How does this manifest itself?
"Possibly, one lender and one borrower could do business together without harm to themselves or to the economy around them. But masses of lenders and borrowers invariably seem to come to grief, as they have today — not only in mortgages but also in a variety of other debt instruments. First, they overdo it until the signs of excess become too obvious to ignore. Then, with contrite and fearful hearts, they proceed to underdo it. Such is the “credit cycle,” the eternal migration of lenders and borrowers between the extreme points of accommodation and stringency.
Every crackup is the same, yet every one is different. Today’s troubles are unusual not because the losses have been felt so far from the corner of Broad and Wall, or because our lenders are unprecedentedly reckless. The panics of the second half of the 19th century were trans-Atlantic affairs, while the debt abuses of the 1920s anticipated the most dubious lending practices of 2006. Our crisis will go down in history for different reasons.
One is the sheer size of the debt in which people have belatedly lost faith. The issuance of one kind of mortgage-backed structure — collateralized debt obligations — alone runs to $1 trillion. The shocking fragility of recently issued debt is another singular feature of the 2007 downturn — alarming numbers of defaults despite high employment and reasonably strong economic growth. Hundreds of billions of dollars of mortgage-backed securities would, by now, have had to be recalled if Wall Street did business as Detroit does."
The end game has yet to be written. However, it may not be a replay of the 1990s. Grant suggests that Bernanke is not the same sort of Central Banker that Easy Al was:
"Now comes the bill for that binge and, with it, cries for even greater federal oversight and protection. Ben S. Bernanke, Mr. Greenspan’s successor at the Fed (and his loyal supporter during the antideflation hysteria), is said to be resisting the demand for broadly lower interest rates. Maybe he is seeing the light that capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich."
Joseph A. Schumpeter would be proud . . .
The Fed’s Subprime Solution
NYT, August 26, 2007