OT-CONSUMER'S CLUCKING

[Guest guest]

While I wish I too could have a glass of raw milk for breakfast, I’ll

have to settle for something else. First, I appreciate your passion and

confidence. The credit crunch if it were sustained would almost

certainly be the worst financial disaster this country has seen since

the Great Depression. Fortunately, the Fed is on the scene so the risk

of such a development has become rather small. It’s true that the Great

Depression was a global event, but so would the current event if it were

left to fester unchecked. Default swaps spread risk, but deregulation

(which I support) and globalization has reduced the number of hands that

hold that risk, which increases the systemic risk of financial accidents

today. What’s going on behind closed doors is far more severe than the

public knows.

The blame for the housing bubble rest solely (IMO) on the shoulders of

the Fed; they allowed interesting rates to be too low for too long. The

flood of liquidity drove bond yields incredibly low, as a result the

yield curve flattened out. Net interest margins tumbled, so lending

became a volume game; of course, lending standards declined to allow

this to happen. Yields were so low globally that investors, banks,

insurance companies…anyone who buys yield, reached for yield. More yield

means more risk, so although delinquency rates on residential mortgage

loans began to rise in 2005, the secondary market for high risk loans

grew exponentially through 2006. This additional liquidity for high risk

loans in the secondary market (not just banks) lead to the story you

outline below. The game of lowering lending standards occurred across

the country for all loans including the leveraged loans that were made

to fund the LBO wave.

Our great nation, with time, will be fine. The composition of the

economy may change some as the economy shifts, at the margins, away from

being consumption based back towards being more production oriented. The

deleveraging process has a ways to go, and that means economic growth

and living standards will likely expand at a more moderate pace than

they have historically. FWIW…the leveraging process has occurred over

the past 12-15 years, not just the past few.