In his Op-Ed, Cash for Trash, Paul Krugman gave the easiest-to-understand explanation for our current crisis. I’ve read a bunch of these over the last week, and this one seems the best.
- The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.
- These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.
- Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.
- Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the ‘paradox of deleveraging.’
The rest of Mr. Krugman’s Op-Ed goes on to evaluate the bailout plan, and you really should go and read it, but I just wanted to post those four steps. With those in mind, I’m going to consider all Fluid Imagination readers as being on the same page.
Now we can have a conversation.
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From a 1999 NY Times article, “Fannie Mae Eases Credit To Aid Mortgage Lending:
“Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.”
”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”
Just saying.
Just saying what?
That it was not all the republicans and Graham that caused this mess and that people knew back in 99 that this could happen. Just making sure we have the blame spread all the way around it seems to only go one way on this blog.