Friday, July 9, 2010

Summer time reading

Continuing our series of excerpts from Walter Russell Mead's essay, "The Top Ten Lessons of the Global Economic Meltdown"

5. Nobody really understands the world economy.

6. That goes double for financial markets.

Financial markets are even more volatile than the real economy. Economists predict, with varying but rarely satisfying results, the behavior of the real economy. Few are so foolish as to predict the behavior of financial markets (and those who do often lose a lot of money). There are good reasons for this. Psychology of course plays a major role in short term fluctuations, and crowd psychology is so far at least largely beyond our power to predict. But there is more. Change in financial markets has been accelerating dramatically with the improvement of computers, communications and software. The avalanche of new securities products during the last twenty years transformed the way global financial markets work. The crash set this process back for a while, but it is sure to resume. Both borrowers and lenders are (and should be) always on the lookout for cheaper, more efficient ways to manage their portfolios and get the maximum results for the minimum cost. Financial firms are, and should be, ready to help make this happen. Over time, new securities products, larger trading volumes and complex hedging and trading programs change the nature of the financial marketplace. There are new risks and new interconnections that, increasingly, neither regulators nor market participants fully understand. As time passes after a crash, both regulators and market participants become more confident that the system is working, and there is a natural tendency for risk tolerance to increase even as risks are becoming harder to measure and price. Sooner or later this leads to a new crash as unexpected vulnerabilities emerge; at that point everyone from regulators to speculators recalibrates and the predictably unpredictable cyclical process restarts.

Starting with the Dutch Tulip Bubble we’ve had about 350 years of financial crashes and panics. They are unlikely to stop anytime soon — and each one that comes will take most people by surprise.

So, by our reading of the lay of the land as presented above, perhaps we can extend the cycles between "bust" periods by applying some common sense and some lessons learned. Eh, not so much...

GuardHill serves all kinds of borrowers, including a goodly number of self-employed folk, successful artists and financiers who tend to garner wealth in windfalls but don't have a sheaf of pay stubs to staple to a conventional loan application. Case in point: One of Dessner's people is toiling now on a loan application from a hedge fund manager wishing to borrow $800,000 against a $4 million home purchase. The hedge's fund did poorly last year, so as a sign of good faith for his investors he's drawing no salary. Good for his business, perhaps, but rotten for a conventional mortgage application.

"This guy made $5 million in 2007 and 2008. He's liquid for $10 million, and he's borrowing 20% LTV (loan-to-value)," says Dessner. A no-doc loan to that kind of borrower shouldn't be political dynamite, especially at a time when the Federal Housing Administration is making 95% LTV loans to low-income borrowers with poor credit and little savings, he argues.

(italics, ours)

Terrific. Making these no-doc or NINJA (No Income, No Job or Assets) loans to people that can obviously make that nut is one thing but apparently the federal government was not content with ruining Fannie and Freddie and is now using the FHA to further its agenda of affordable home ownership for all.

Remember, it's all about making a better America even if we can't afford it.

1 comment:

K T Cat said...

The whole financial crisis came as much from social engineering as anything else.