Wolfgang Münchau on the Current Financial Crisis
The Financial Times has a good column by Wolfgang Münchau, noting that if the current credit crisis were just about sub prime mortgages, it would already be over. The problem is that there is way more money tied up in other ventures that are find so long as defaults and insolvencies stay at reasonably low levels. Combine that with a recession - and it seems pretty clear that economies are slowing - and the results could be really bad.
Permalink posted by Erik Sherman at 11:30 AM
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As the recent coverage of the impact of the sub prime crisis on the financial community makes clear, there are two distinct sub-prime crisis surfacing in this country: one in the real estate, home ownership, market; the second in the financial community. One is affecting average American households, the second is affecting larger financial institutions which often placed huge speculative bets using shareholder money. It is important not to confuse the two, particularly in the public debate that will inevitably frame the basis for government policies aimed at ameliorating this situation.
The homeowner sub-prime crisis is reflected in the acceleration of residential mortgage defaults, and, if not addressed, will most likely become evident in the rise of personal bankruptcies and other indicia of personal hardship. Government policy in this area should be targeted to determine if, and to which constituency, interim relief measures, like freezes on adjustable mortgage interest rates, will help fix the problem. If it is determined that a class of homeowners is likely to be able to support their mortgages if existing, pre-adjustment, rates remain intact, then either voluntary action by the lenders, or government legislation to accomplish a temporary freeze in these rates would be desirable.
The other sub-prime mortgage crisis is the mounting pile of losses being experienced by the financial community which results from ill conceived, highly speculative or little understood bets that these institutions placed on the performance of the residential mortgage sector. When considering whether remedial actions are warranted to bail out these institutions, we should not forget that on the road to placing these bets, these institutions racked up huge profits from the fees and other charges they received for arranging these bets. At a minimum these fees should be approximated and taken into account before anyone determines that these institutions deserve a publicly funded bailout.
We would also do well to remember the financial community's pleas for public assistance the next time we, as a society, are asked to consider, welfare reform, assistance to public education, help for the indigent and other public assistance projects.
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