A manufactured banking crisis is killing the economic golden goose. Who will pay the piper when the bills come due?
Way back in the Thirties, there wasn’t a whole lot of entertainment available for children, particularly children who grew up in Southern Illinois in the Depression. Any entertainment you came across was often of your own making. For my father and his friends, Halloween was a particularly treasure filled entertainment venue. Most of the bets were off, and acts, which usually had adults coming after you with a razor strap or belt, were written off as Halloween pranks.
Leaning back in his wheelchair, going back in time, some 70 years earlier, he told about how he and his friends scouted the neighborhood for “just the right outhouse”, then they’d all come together, push it over, and run like mad. Clapping his hands, with the gleam of youthful hijinks fueling his memory, my father grinned a sneaky grin and told how the fumes from the smelly pit stank. This memory comes to mind as I read more about the manipulation, machination and money laundering behind the so-called ‘housing crisis’.
What many writers fail to do is call this mess a manufactured crisis. Yes, that’s right. M-A-N-U-F-A-C-T-U-R-E-D.
How, so, you ask? Well, economics is cyclical. Simply put, what goes up, must come down. Nothing rises or falls forever. At some point, rising prices drop and falling prices rise.
No doc, low doc—suspend reality mortgages, fueled one of the most lucrative housing booms in history. And during the boom times, the financial wizards and wanna be king makers wined and dined themselves into an orgasmic stupor, while the tainted investment ‘instruments’, which they sold, flew around like drunken birds in a persimmon patch and landed in the coffers of some of the most prestigious banking institutions and pension plans in the world.
The pendulum is now swinging in the other direction and the piper has come calling for his due. All of the risk is playing out, and, irony of ironies, those who devised the game are howling at the unfairness of the consequences. Now the birds are coming home to roost in the banking industry, and the well-coifed, expensively dressed high rollers and their institutional employers ran howling to the government for a bailout. That’s right BAILOUT.
Don’t be fooled by this so-called ‘mortgage bailout’, because industry experts already know what this twisted piece of politically expedient legislation is: it’s a combination bank bail out and prayer for a miracle. The banks have to be bailed out of these loans, else the folk they sold the poison paper to—that’s other banks and institutional investors, will come calling with their legal leg breakers and sue them out of existence. Now, here’s where the snake venom starts to kill the golden goose.
According to federal banking rules, banks have to maintain a healthy loan to deposits rule, usually 10:1. That is, for every buck they have in deposits, they can loan out ten dollars. (Wow, gimme sum a that bankin’ magic). One of the root causes of this current mess is that the bankers have been playing numbers games with deposits, and it goes like this:
The first technique banks used to circumvent regulators' rules is known as "securitisation" - a way of a bank getting loans it had already made off its balance sheet. They did this by selling their loans off to pension funds, insurance companies, even to other banks around the world.
Professor Nouriel Roubini, the head of a leading New York firm of economic analysts, says securitisation was key to helping banks avoid the regulators' 10:1 rule. "You make a bunch of mortgages and then you package them and you sell it to someone else," he explains. "Therefore it goes off the books and therefore you can make even more loans. (City of debt shows US housing woe, Michael Robinson, BBC World Service 1-1-08)
Taking a maggot filled cake, covering it with a nice coat of frosting and serving it at a formal dinner party does not turn the maggot-infested confection into a prize winning cake. Somebody was bound to notice all of those nice little wigglers before they started chomping. Well, maybe.
In the self-deluded, reality impaired world that we operate in, many would be diners/investors, convinced themselves that they were not looking at maggots. They turned reality on its head and told themselves that the wigglers were a new kind of heat-activated sugar granules. Not! A maggot is a maggot is a maggot. And a pyramid scheme is a house of cards that can not stand.