On a televised global leaders economic conference in Istanbul one speaker restated the shibboleth, “The economic crisis came from bad mortgages.” In my last piece I referred to the point made by my colleague, Harlan Green, that adjustable rate mortgages (ARMS) are great values now since they have been adjusted DOWNWARD! All those bororowers who were supposedly in over their heads, now find that their mortgages are easier to pay.
Could we finally lay to rest the idea that the “Great Recession” came from too many poor people getting mortgages that they did not “deserve.” The recession came from our failure to understand the huge credit supply coming from securitized debt, mortgage backed securities, collateralized debt and derivatives. Our failure to understand the full size and nature of this credit supply led us to panic driven devaluations of the investments build on this debt, that savaged bank and other financial institutiion balance sheets, that led to the credit freeze, that led to a decline in consumption, that led to reduced production, that led to massive layoffs.
We have stabilized the financial situation, but have not yet restored consumption levels that would induce putting people back to work. We have also not yet adopted rules and regulations that would make the securitized debt market more transparent and thus less subject to mistakes. These two problems have to be addressed rapidly or unemployment will remain high and we will repeat the same errors. And the results will seriously impact the next election.