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The First Big Book On The Credit Crunch

According to the Economist, Charles Morris is the first to really assess the current crisis of the financial market in his book The Trillion Dollar Meltdown:

He describes three trends converging to create the bubble: By 2006 the growing trend towards deregulation had pushed three-quarters of all lending outside the purview of regulators. Securitisation created a serious agency problem, leaving loan originators, who were paid up-front, with no incentive to avoid bad credits and every reason to piggyback inappropriate products onto good ones [...]  Banks and rating agencies were gripped by the pretence that all finance can be calculated by risk-modelling eggheads. It did not help that many investors blindly accepted the rating agencies as a kind of “financial Supreme Court”.

In addition, the "Federal Reserve fuelled the housing boom by sharply cutting the cost of short-term money. Mr Greenspan ignored warnings about subprime excess, while eagerly championing 'new paradigms', from hybrid mortgages to credit derivatives." As for the solution:

He offers a raft of suggestions: originators should retain the riskiest portion of securitised loans; prime brokers should stop lending to hedge funds that fail to disclose their balance sheets; trading of credit derivatives should be brought onto exchanges for the sake of safety, even if this raises costs; and some version of the old Glass-Steagall act, which separated commercial banking and capital-markets activities, should be re-introduced. Ultimately, he argues, after a quarter-century of “market dogmatism” it is time for the regulatory pendulum to swing the other way.


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Don S on :

I have been following the Irvine Housing Blog lately. It provides an interesting perspective to one of the cutting edges of the housing crisis in the US, Irvine California. Irvine is a fairly upscale community in Orange County, California. It's not noted for subprime borrowers, but a lot of dodgy practices were also rife in Irvine. These practices helped drive housing prices to absurd levels. I was not unusual in Irvine for a house which sold for $200,000 in thelate 90's to have soared by 300% or more of that price by 2006. The trouble is that many homeowners borrowed against the higher price and are now in trouble. Or sold to a speculator who took a 100% loan with a bank - and now the Bank is in trouble. Reading this blog has occasioned in me a very strange reaction - sympathy for the banks! They were patsies and suckers, but they were taken advantage of. It's harder to feel too much sympathy for many of the borrowers - too many of them are walking away from the houses, or seemed to view their house as a handy ATM machine from which to finance spending sprees with & now the bill is coming due. I do have sympathy for buyers who put a substantial down payment down and bought at the top of the market (2004-now) but there don't seem to be very many of them. One thing to note is that the situation across the US is variable - It's not all like California. Even all of California is not like that! Lot's of cities in the middle of the country (Midwest, Far West, South) did not have a bubble like the coasts did. Rule of thumb is that the faster that prices rose the faster they will come down. The US isn't the only place with a bubble, either. London (where I live) is arguably worse than Orange County, though the crash hasn't really taken hold here yet. Prices in inner London are gigantic and that has driven prices much higher in outer London. I think once houses cease to be regarded as commodity investments and again are seen as places to live London is going to see a crash which may dwarf the 30% fall between 1989 and 1994!

Pamela on :

too many of them are walking away from the houses And the funny thing is, the computer models used to rate the risk on these loans never took that into account - that people would just stop servicing the debt. So much for 'the smartest guys in the room'. I'd like to see one small change in the regs. The loan originators can't sell the loan for 2 years.

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