Five Things You Need to Know: Credit's Autoimmune Disorder
Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:
Much is being made of JP Morgan's (JPM) plan to modify $110 bln of mortgages. Minyanville's Andrew Jeffery offered his take on it here. The bank said it won't put any loans into foreclosure while it follows through on plans to open regional counseling centers over the course of the next 90 days.
This has all been tried before; it's nothing new. In doing some reading on this I ran across this paper presented to Congress in early September asserting that this crisis won't be as severe as the Great Depression.
"The Great Depression saw falling asset prices along with growing, and persistent, unsold inventories for many commodities and for farm mortgages. The magnitude of the problem during the Great Depression was far greater than problems in the current housing market... In drawing lessons from the Great Depression, ([Fed Chairman Ben] Bernanke says that a “...major aspect of the financial crisis (one that is currently neglected by historians) was the pervasiveness of debtor insolvency. Given that debt contracts were written in nominal terms, the protracted fall in prices and money greatly increased debt burdens... Some would argue that evidence from Depression-era moratoriums is not necessarily the best analogy. As discussed above, farm mortgages were often the primary source of family income so that falling commodity prices simultaneously reduced the value of the farm and the ability to make mortgage payments, unlike the present situation in which an individual household’s income is largely divorced from house prices."
Those seem like reasonable points on the surface, but looking at household savings along with debt-to-income levels and debt-servicing ratios, it is actually more worrisome today.
Unlike the Great Depression when insolvency was largely concentrated among farming families and mortgages (which made up a very high percentage of the population), insolvency today is not only deeper and more pervasive, but far more difficult to engage from a policy standpoint precisely because of a lack of concentration in any one industry.
I suspect we will be able to look back in hindsight and view this present debtor insolvency (and oversupply of houses) in terms of a massive degree of over-consumption that was difficult to evaluate because we were actually living in it; a bit like trying to see the back of your head while staring into a mirror.
There is another, secondary argument that I believe is pushing policymakers to misjudge and dramatically underestimate the severity of this crisis - that is, the globalization of finance and supposed "diversification" of the global financial and risk management industry. The apparent "complexity" of the financial system today is actually masking the core issues for policymakers. Very simply, those core issues are debtor solvency and oversupply.
You can build a hamburger with one ingredient, ground beef, or you can use 100, but in the end it is still just a hamburger. Our credit system has 100s of ingredients these days, but it's still just a hamburger... one that has been doctored up with all of these fancy ingredients.
Think about it this way. The word credit comes from the Latin "credere", which means, literally, "to believe, or to trust." That is really all you need to know about the modern financial system. When the "credere" is gone, the whole thing unravels, and it works both ways, from lender to borrower, and from borrower to lender. This is why monetary and fiscal policies are not working.
Credit is nothing but a belief. That belief, "credere", stretched to its limits by the policies of endless credit expansion, was weakened to such an extent that it has developed what may be likened to an autoimmune disorder, a condition where the immune system mistakenly attacks itself, destroying even healthy body tissue in the process.
Under normal circumstances, without excessive credit expansion policies, the system's immunity defenses would attack and destroy the toxic substances - such as subprime mortgages - and leave the healthy tissue alone. However, the system now has turned on itself and is attacking healthy body tissues and toxins because it can no longer distinguish between the two.
Unfortunately, autoimmune disorder often results in the destruction of the body itself (the financial system), or abnormal growth of an organ (government and regulation) and/or changes in an organ's function (the banking system). At this point, we have no idea what the outcome will be, but I think our doctors (policymakers) are dramatically underestimating the disease.
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It was a mess, and it's hard to pin down relationships between Depression farms and today's credit debacle.
Back then, a mortgage was a mortgage, not a cog in a "structured investment vehicle".
A mortgage was a tool to deal with real needs and real equity/commodities, not a piece of paper with the signature of a charlatan selling other mortgages bundled with promises bundled with more promises.
They had a drought. We're having a planet-wide bake-off.
But ethics that go beyond the law can often prove a near-term competitive disadvantage.
Which means that business ethics must be established by regulation. Lots of them, not just a few. You have to cover all the important issues.
Which means that the Reagan / Bush / McCain / Gramm deregulation politics is, long term, extremely bad for business, jobs, workers, borrowers, lenders, international trading partners, and everyone else that matters.
Q.E.D.
Businesses are fumbling around in the dark, but nobody will turn on the lights. We just get different guides with assurances that now it is all OK. Actually, we get the same guide with a disguised voice. And that is supposed to reassure business enough to plunge forward!!!
Nonesense. We already have laws against fraud, misrepresentation and usury. We need to start obeying and prosecuting more diligently against those crimes, even if they appear on the surface to be of benefit to everyone. Not obeying the constitutional laws already in place are what caused this crisis.
If we prosecuted the banksters back in 2003 for selling their instruments as 'just like cash' investments, they would have stopped doing it. But it was seen to benefit everyone. Poor guy gets a house, bankers make sick profits, share prices rise, economic growth rises, etc. Until it all comes tumbling down. Now we start pointing fingers.
If you commit fraud (brokers, apraisers), you go to jail. If you counterfeit money (the fed), you go to jail. Simple.
10's of thousands of pages of regulations couldn't prevent this. Adding thousands more won't make any difference. We already have all the laws we need, we just need to start following them again.
So, looks like things have gone EXACTLY as the peasants wanted.
Consumption based economy post WWII.
Move off of farms to cities and suburbs post WWII.
Fewer children, more toys, fewer families, less religion, more greed and consumption, less production.
Massive social programs requiring increased taxation which reduced savings and the incentive to work.
A societal conscience that has gone into debt for an illusory standard of living and reality; an entitled underclass "plow" of serfs legal and illegal, a middle class "horse" yoked with the tax burden, and an upper class "farmer" whipping the emaciated horse.
No surprise that Obama is supported by the entitlement class and the likes of Soros and Buffet.
Comrades!
As if government ever solved any real problems...oy vey...
