In early 2002, we started getting ad requests for mortgage brokers selling 105% mortgages; no-doc loan mortgages; bad credit and no credit loans; and low ARM loans. They were all quite slick. When they discovered that they had to pay when they placed the ad, they disappeared.

I can remember my partner and I saying to each other: It may take three or four or six years, but this will come to tears.

Anyone with two eyes, two ears, and an IQ above room temperature, knew that these loans were trouble. Housing prices were going through the roof, and a lot of people were being priced out of the market, which was bad for the mortgage companies. If they can't loan it, they can't make any money on it. They solved THEIR problem by finding a way for money to become cheaper - at least for long enough for them to repackage and resell the loans.

Trust me on this, plenty of us saw it coming.

In 2001, there was an article in the Washington Business Journal that had this to say about Fannie Mae and Freddie Mac:

"Indeed, as Fannie and Freddie strive for the high-octane growth craved by Wall Street, they are increasingly turning to risky areas such as subprime and home-equity loans, thus ratcheting up their risk and increasing the odds of a costly taxpayer bailout."

http://washington.bizjournals.com/washington/stories/2001/04/16/story1.html?page=6

It is hardly to be expected that he'd talk up a financial crisis. There's a lot of things that have to be taken on faith in the economy (e.g. counterparty risk) that can cause problems. Saying a year ago: "hey everybody, bend over and kiss your ass goodbye" might have been accurate, but not helpful.

So, a wise man might take the pronouncements of the chairman with a grain of salt and focus on the governors, as we see works well in this case.

Back in, oh, 2002-2003, when I lived in Chicago, watching the McMansion-boom take hold and the type of financing those homeowners-to-be were offered, me and my then friends told each other, "this will not end well," "this is the next bubble..."

Add to that, the way America has financed the war and neglected to invest in infrastructure, etc, while building a huge budget deficit. That money spent on the war - they are actual dollars - have to go somewhere. They have flooded the economy. They are in the hands of banks and other lenders, and because they have not been used for investments (but for consumption of bullets and army food, etc), no real value was created in the exchange.

The world is waking up to these facts. America is simply way, way, way over valued. The interest rate cuts by the fed aims to stimulate investments and create demand for goods. But with an infrastructure way behind the rest of the western world and a government who doesn't want to do its part (but prefers to buy bullets) nobody will want to invest when they can do so on friendlier ground. Besides whatever demand for goods there would be, that wouldn't benefit America that much anyway, because America has given away the manufacturing of those goods to other countries already a long time ago.

(I am a macro economist and currency trader by profession - now living in Sweden, but anyone with half a brain could have figured this out a long time ago)

Why is the ppt never discussed? I cannot help but feel they have some culpability. They're Paulson's enforcement and a profoundly un-free market force. It seems incredible that no-one ever talks about them.

Aren't the lessons of the last quarter-century obvious?

1) Republicans can't be trusted to manage the economy.

2) Republicans can't be trusted to run their own businesses without regulation and supervision any more than football teams can be trusted to play without a rule book and referees.

3) There is no one so foolish about money as a rich man.

From what I understand, that's what basically undid Bear Stearns.

I actually think Geithner is making a very simple point in the quote, but he's couching it in Fed-speak so as not to let the layman in on what he really means. I would summarize as follows:

"The Fed, the Treasury Department, and the SEC really don't know what all these hedge funds out there are trading each other, except there's way more money involved than there used to be. Therefore, if something bad happens--which is rare--the results could be catastrophic."

The rationale for leaving hedge funds unregulated was that only "sophisticated" investors would be hurt if one or more of them failed. Well, what we're seeing now is a colossal failure of our regulators to imagine a scenario where the failure of interconnected and hugely leveraged funds brings down the whole global financial house of cards. What makes this inexcusable is the Long-Term Capital Management scare back in the late 1990s. If what's going on now gets much worse, that episode will be viewed as the "Bin Laden Determined to Attack Inside the United States" memo of this current fiasco.

on inventing new crimes. it's the sort of innovation that continues after earning an honest buck becomes too hard and not rewarding enough. besides, some people don't know how.

I remember a conversation I had with a friend back in 2001. She was a commercial real estate broker and she told me about a conversation she had had with a colleague. This guy specialized in finding jumbo mortgages for people with over $100,000 in credit card debt. I asked her how hard it was to get a mortgage under such conditions she said that they paid a point or 2 more in interest but that was it.

Since it was difficult for me to decide who was the bigger fool in that situation, I concluded that the run up in real estate prices was not going to end well.

Ever since I have kind of felt like a guy stranded on a low lying desert island, equipped with only a Seismograph and it had just gone off registering a 9.0 quake somewhere off shore. Anybody know where the high ground is?