Wednesday, March 4, 2009

How about another bubble...?

According to the Wall Street Journal this morning, the genius' who gave us the credit system's massive coronary through government intervention which led to a "shadow market" of credit want to find a way to re-clog our arteries...

Much is riding on the initiative, known as TALF for Term Asset-Backed Securities Loan Facility. At the height of the credit boom, Wall Street issued more than $1 trillion a year of securities that were backed by consumer credit, and trillions more backed by mortgages. These markets -- sometimes called "the shadow banking system" because they operate outside traditional bank activity -- accounted for roughly 40% of all consumer lending before the financial crisis erupted last year. But the market dried up last year. Issuance of securities tied to consumer loans dropped to less than $8 billion in the final three months of last year.

"There has been somewhat of a collapse of the banking system, but an almost total collapse of the shadow banking system," said Princeton University economist Alan Blinder. "Given our reliance on the latter, we need to get that shadow banking system revived."

Hey, great idea America. You just had a massive blow out heart attack so... lets go out for chili cheese hot dogs, bacon cheese fries and Crisco soda on us(really it's on you...but most of you rubes don't understand this after we use the word derivative.) If we believe and wish and know that hope, change, rainbows and leprechauns are real reinflating the bubble larger than before will work. What a great idea!

At the heart of the collapse of our credit markets was the securitization and packaging of debt into more palatable risk for banks and other providers of credit to the public at large. The government demanded that providers of credit extend more credit to individuals who didn't fit into their risk schemes. As with everything that the government does when attempting by edict to make outcomes equal the risk is spread out to consumers who were, or are, credit worthy. Instead of the issuers of credit passing on the risk to their "prime" customers, the loose monetary policy and low interest rates provided by the FED led to the risk being spread amongst institutions. Washington is at fault in this crisis and don't seem to realize that they are the cause of the continued rot of these securities at the heart of our problem. The market found a way around the government intervention to continue to lend to people who couldn't afford to pay.

Instead of trying to reinvent the wheel and making free markets more equitable in their distribution of outcomes, the government needs to be the overseer of the market system in a way that doesn't resemble Hobbes Leviathan. What the feds will never understand is that the market will do more to reward the producers and punish the frauds and cheats than any government czar will be able to do.

Scary times ahead... stay tuned

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