Next year’s recession is already baked-into the market. And probably the next years‘. And maybe the years’ after that. (Picture by Daniel Guidera for iTulip.com
).
Alan Greenspan, the self-proclaimed genius whose silence in the face of frauds never-before imagined has as much to do with this as anything else, admits it. Secretary of the Treasury Henry Paulsen is waking up to it. Banks are trying to build a firewall, but it’s too late, too small, the banking Katrina is in the Gulf and it’s coming onshore.
The problem is not what you think. It’s not the gross size of the debt. It’s not the debt’s quality. It’s the way that debt was allowed to be used, the way it was mixed together, good debts with bad debts, into instruments and options. Now that some of those debts are going bad, no one knows who has them.
(Cartoon from the St. Louis Post-Dispatch, via Bigpicture.com.)
Normally you could write off some loans, isolate and work the
problems, then go on with your business, perhaps a little lighter in
the wallet. This can’t happen now. The good debts are mixed in with the
bad so no one knows how much the debt they hold is worth.
The result is uncertainty. Markets hate uncertainty more than they
hate anything else. No one knows what their paper is worth. Any figure
is just a guess. So they can’t trade it as they did before, no one can.
This has paralyzed the financial system at just the point where it
needs to be nimble. The wave of adjustable mortgages adjusting from
"teaser" rates to "market rates" is growing higher-and-higher — it
won’t crest for nearly a year — and until lenders can get themselves
out from under they can’t possibly help the borrowers. But they can’t work
themselves out, because they don’t know what their own paper is worth,
nor anyone else’s. They’ve literally tied themselves up in knots.
Imagine, if you will, finding yourself tied up in knots when the
tsunami warning goes up. If you’re really lucky, someone will pick you
up and carry you away to safety. But chances are they’re just as
panicky as you are. And chances are, also, that they too are tied in
knots.
So there we sit. Not just Americans, but Europeans and Arabs and Chinese too. Boy oh boy, Chinese too.
Which means there is nothing to stop the number of foreclosures, and
no way to open the lending windows to either new or existing borrowers,
unless they’re absolutely A+ credits you can place against new
deposits. (You remember making loans against deposits, don’t you?)
All this happened in broad daylight. The creation of this worthless
paper and these worthless options was very well-publicized. These hedge
fund smart guys were going to use their fancy computers to weave the
straw of bad paper into the gold of good paper, like threads in a
blanket. It don’t work that way.
So at some point, undoubtedly too late, loans will have to be
written off. A lot more loans than we thought we might have to write
off, because new loans are coming due and can’t be re-written.
Greenspan watched all this happen. He let the regulations be ignored.
He said nothing. He even encouraged people to speculate on their own
homes, a few years ago, which just made things worse.
Maybe Greenspan thinks, oh the Democrats will take the blame and
then when the problem’s solved we’ll march right back in again, like
nothing happened.
But the story will come out. It will be told. We’ll all know. Just
as we know who is to blame for Iraq, and who is to blame for the
culture wars, and who is to blame for all the other ills of our time.
People aren’t stupid. Greenspan never was that smart.
He just pretended to be. Just like everyone else did.
