This is the end
Peter Hoskin 6:58pmThanks to David Brooks's Sidney Awards, I've just caught up with Michael Lewis's article 'The End', which appeared in Portfolio magazine last month. It's one of the most incisive and exhaustive pieces on the credit crunch that I've read so far - exactly what you'd expect from the man who wrote the supremely readable account of 1980s Wall Street life, Liar's Poker - and I'd recommend it to all CoffeeHousers. As with most of these accounts, it's stuffed with debt-bubble anecdotes which still have the capacity to astonish. This one, concerning pre-crunch mortgage-lending, jumped out at me:
"In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000."
So many of these snippets seem like the the first half of a modern parable; with the second half - the bit that tells us what we've all learnt from this - still being hammered out by governments and financial institutions across the globe. It's obvious that credit conditions need to be tightened, but they can't be tightened to the point that credit dries up. Hitting on the correct balance and pulling the right levers to maintain it - something our Government has distinctly failed to do so far - will be one of the greatest challenges facing policymakers in 2009 and beyond.
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Comments
Ruairidh
January 3rd, 2009 9:03pmExcellent recommendation.
It’s articles like that that blogs were designed for. A pointer to an article I’d never have casually surfed to myself because I don’t have the time to wade through the jetsam of the internet to find it.
dilys
January 3rd, 2009 9:46pm"As with most of these accounts, it's stuffed with debt-bubble anecdotes which still have the capacity to astonish."
Has anybody checked to see if that is true?
I'm doubtful of the verity of any 'facts' that astonish. I'd hope jounalists would be too.
mikey c
January 4th, 2009 1:40amI read this a few weeks ago - the most succinct article on the current financial and economic turmoil that I've seen so far.
The most striking argument to me was the massive increase of risk appetite amongst top investment bankers after public listing.
Could you imagine the partners of PwC pushing their luck to the etent that the managers of Salomon, GS, Northern Rock etc. did?
A classic case of the 'principal-agent' dilemma, and a warning of the downside of floating a business.
Trumpeter Lanfried
January 4th, 2009 8:47amNot to worry. I see from the BBC website that the Prime Minister is to create 100,000 new jobs. So that's all right then.
Denis Cooper
January 4th, 2009 11:04amSurely the problem was (and still is) the system under which the original lender can sell on large numbers of mortgages, washing his hands of them, and the purchaser can then sell them on again (with or without remixing and repackaging), also washing his hands of them, and so on.
Traditionally when somebody borrowed money to buy a house they formed a direct relationship with the lender, and that relationship was usually maintained until the mortgage was redeemed. There might perhaps be one change during the typical period of the mortgage, for example if the building society merged with another, but basically it was a stable long term connection between the borrower and original lender.
Under the new system, borrowers and lenders become separated; and having bought up large batches of mortgages on trust in a secondary market, the latter no longer have any easy way of checking whether the former should have been lent the money in the first place, or whether there is any prospect that the loans will be repaid.
So, who now owns the mortgage on that property in Bakersfield, California? Almost certainly not the original lender, and not necessarily a mortgage company with a branch in Bakersfield, or in California, or even anywhere else in the US.
It could be a bank or other financial company on the other side of the world, and maybe the only way they could find out what value to ascribe to that particular mortgage would be to employ local agents to physically go round and check whether the borrower was still living there, or the property was empty and becoming derelict, whether he was still employed and if so with what income and prospects, etc.
veryscarybiscuits.blogspot.com
January 4th, 2009 5:55pmIt's a myth that we can't cut back on credit. This is the equivalent of a smoker saying he can't give up but it could perhaps cut back a bit. It just puts off the day when he really has to give up.
Credit needs to be cut and it will cause a huge depression. The question is whether we have this now with the existing level of debt or whether we have it later with even more debt. Politicians, for obvious reasons, seem to be favouring the latter.