April 10, 2007

The subprime implosion, financial excess and an obvious accident waiting to happen

I love the headlines "analysts surprised" when it comes to things that we all know for certain, like the fact that the subprime implosion isn't "contained" as the Fed would have you believe, and that indeed it is spreading, most obviously into the "liar's loan" or Alt-A portfolio. And the true spillover effects into the housing market and US economy haven't even been seen yet, even though you damn well know they will be, and soon.

"Analysts Surprised"? Try "Analysts should have been reading HP", because it's all so damn obvious. Here's a good article on the subprime debacle, and what's to come.

Greed could bring America’s housing sector to grief

For hundreds of thousands of Americans, it is a personal financial disaster. For the wider US economy, it is a growing economic shock with an increasing potential to inflict severe repercussions on the nation’s prospects and prosperity.

The deepening scandal of the US “sub-prime” mortgage implosion looks more and more like a cautionary tale of financial excess that sits unhappily alongside Enron and the dot-com bubble, both in terms of scale and consequences.

It is story of Dickensian bleakness: of avaricious money-merchants and of the broken dreams of struggling but foolhardy men and women who seized on false promises of an easy leg up the ladder of their own aspirations.

Viewed in hindsight, the debacle that is now unfolding was, like many such events, an obvious accident waiting to happen.

Around the turn of the decade, as the US housing boom accelerated, a large group of greedy American lending institutions became so rashly intent on maintaining the growth of their loan books at all costs that they began to hand out mortgages to borrowers with varying combinations of poor credit history, no steady source of income and little or no collateral.

As lending criteria grew more and more relaxed, the risks associated with this reckless “sub-prime” lending escalated, with vulnerable borrowers being given access to loans for 100 per cent of property values and high multiples of their incomes. And, just as soaring house prices meant that more people had to resort to such sub-prime loans, so sub-prime lending itself gave more fuel to the property boom.

It is plain that the social consequences of all of this are as grim as they are scandalous. Yet many US analysts appear excessively relaxed about the wider fallout for a slowing American economy, arguing that the scale of the sub-prime market means that any spillover effects will be slight.

This looks about as complacent as the thoughtless lenders who are now going to the wall. Not only is it clear that the sub-prime crisis is going to get a whole lot worse before it runs its course, but the potential for a domino effect hitting large parts of the United States’s housing market, and the wider economy, looks rather greater.


Anonymous said...

Keith--check out the front page of the Washington post--today. A year behind and I guess next they will be announcing the existence of the pacific ocean! Check it out!!!!!

tmaioli said...

Let the panic phase begin

Anonymous said...

"In business since 1939. And out of business in 2007."

area 51 said...

Funny how, to the Brit author, it is "plain-to-see" and "obvious" the US bubble was a disaster waiting to happen, while he fails to notice the gigantic freight train, barreling down at breakneck speed in his own country...ha ha.