Problems Looming In The Economy
The world’s financial system is as weak now as it has been in many decades. Federal Reserve Chairman Ben S. Bernanke has one gigantic problem on his hands: a very wide-ranging credit freeze up. This is a problem that mere cuts in interest rates cannot cure.
The exceptionally low interest rates of the early and mid-2000s and the continual bailing out by Alan Greenspan of any Wall Street firm that got into trouble created huge temptations to speculate with borrowed funds and throw caution to the wind, completely ignoring risk. Why worry about risk when it’s not your own money and even if you get into trouble you can get bailed out? This problem is called moral hazard.
Now there’s a problem. Those speculative derivatives do not have the value that the Wall Street conmen claimed they had. There’s a frantic race to de-leverage at almost any cost. Of course, buyers have disappeared. No institutional investor wants to buy more highly overvalued speculative packages to his portfolio now that the true worth of these packages is exposed in the light of day. We are in a liquidity crisis the size of which we haven’t seen since before World War II.
Commercial and investment banks sitting on overvalued and illiquid assets such as mortgages and private equity loans mixed with derivatives can’t sell them because they are of highly questionable worth.
Hence the bailout by the Fed, in the form of longer-term loans at the discount window. What else can they do? Let the entire financial foundation of the globe completely freeze up?
The government rescue of over-leveraged financiers is still only beginning, and the signsthat it will grow are numerous. Real estate prices continue to fall. Loan funding is shrinking rapidly. First Time Home Buyers are practically locked out of the mortgage market unless they have near perfect credit and a large down payment. Most don’t. There aren’t enough first time home buyer programs to meet demand. The House Financial Services Committee has mortgage business was at the bottom of the Great Depression. Does that indicate how bad this crisis is?