I’ve been thinking lately of this old nursery rhyme, and its idea that there can be complex and far-reaching negative repercussions from lack of timely remedies that would really have been quite simple:
For want of a nail the shoe was lost.
For want of a shoe the horse was lost.
For want of a horse the rider was lost.
For want of a rider the battle was lost.
For want of a battle the kingdom was lost.
And all for the want of a horseshoe nail.
It’s seems axiomatic that lending money to lots of people who can’t repay, doing this on a huge scale, and spreading the risk around to every financial institution so that all are affected by the inevitable default, is a terrible idea. I’m no economics wiz, but even I can see that. The whole thing was predicated on the idea that housing would always rise. But had no one involved ever heard old adages such as “what goes up must come down?”
It’s puzzling. The explanation may be that in the short term everyone seemed to benefit. And now we all pay for that illusory free lunch.
When I say “all,” I’m speaking worldwide. We’ve been so focused on our own Congress and our own Presidential race that it’s easy to ignore the fact that this crisis is worldwide. And that’s not only because the entire world is affected by what happens here. It’s also because it’s also happening there, to a larger or smaller extent.
This article at Flopping Aces makes it clear that not only is Europe feeling the effects of our problems, but they experienced a similar cause. Here’s the money quote (B&B is a British mortgage lender that has failed):
But rivals are reluctant to take ownership of B&B’s book of 41 billion pounds of residential loans — representing 3.4 percent of British mortgages — as many of them are higher risk buy-to-let and self-certified loans and the British housing market is weakening, raising the prospect of rising bad debts.
Interesting, no? The piece goes on to say that although the UK did not have the legislative mandates to make the subprime loans that the US had, they were making a great many subprime loans anyway because they were riding the wave of increasing home ownership, both reacting to and therefore helping to fuel the housing bubble.
So what’s the lesson? (too late, perhaps…) Easy money = flood of buyers = unsustainable price hikes = economic spiral.
And it’s entirely possible that a “feel good” Congress started this world wide trend… all by themselves. Oh goodie.
So what’s the story? If the other nations were not under a US mandate to force subprime risky loans, why did the other nations follow suit?
Cash… it was a lucrative market. Private enterprise doesn’t need mandates to identify a money making proposition. And once the US identified that market by government mandates, and the other nations saw just how profitable it could be, is it any surprise that it’s a “monkey see, monkey do” scenario?
This gave me a bit of an “aha” moment. I’d been puzzled by the fact that bankers and lenders, once so careful with their money, had somehow become so loosey-goosey. Now I see it this way: the Congressional mandate that lending institutions make subprime loans to buyers who couldn’t afford them was the first nail that was lost, as it were. It took away the brakes on lenders, and made them see that, in the current rising housing market and with the current low interest rates, it might be profitable to expand risky loans to more and more buyers. Buyers, of course, were only too happy to oblige, the bubble was fed, there were more buyers needing help, and as the bubble grew they counted increasingly on continual growth of the bubble to meet their loan payments either through refinancing or through flipping. Once lenders around the world saw how things were going, they got on board too. And then there were the derivatives and….well, you know the rest.
And all for the want of a sane lending policy.