Falling Sky Syndrome

Just the other night, I watched Jon Stewart’s Daily Show report on the economy. He was berating the networks for interrupting David Blaine’s latest stunt, the “Dive of Death” with breaking news about the American economy’s, well, “Dive of Death.”

Like so much financial news lately, I wanted to laugh, but had a hard time bringing myself to do so. Every day I’m answering a few phone calls from friends and past clients, all asking the same thing “What the (heck) is going on?”

Two years ago, near the beginning of the Mortgage Meltdown, a retired banking industry friend of mine explained a concept to me: there is no such thing as money.

There used to be. It was backed by precious metals. Today, we all exchange credit. Since US credit (in the form of 5’s 10’s and 20’s) is universally accepted, this sci-fi money system has worked pretty well for us. In the past two years, we’ve seen what can happen when the availability of credit shifts. The current economic crisis didn’t begin as a meltdown – just a liquidity problem.

Many mortgage lenders weren’t lending money. When you arrived at the closing to buy your home, there was a check there from the “lender”, but they borrowed that money from someone else. A big middle-man lender like American Home would have had huge reserves of credit, but modest reserves of cash. After the closing, they sold the asset that was the mortgage, paid off their credit line, and then had room to lend more money. When Wall St investors started to see the housing market current change, they weren’t willing to buy these mortgages any more. That meant the mortgage lender couldn’t profit on the sale of the loan, or repay their credit line, or have more “money” to lend. So, Lender goes out of business, news headlines flash and Wall St investors get nervous and buy fewer loans.

What we face today is the same problem on a larger scale. I can’t say what started the circle – the housing market, the credit cycle, weakened dollar or something else. The Big Investment Banks who are dying like Mayflies are a delayed reaction to the Meltdown of 06-07. The people who were lending the credit to the people who were lending credit to you and I have now run out of credit. No “money” to lend slows buying. Fewer sales (of anything) means lost jobs. Lost jobs means more people who have to buy with credit – which they can’t get, so they don’t buy...

I have yet to hear a very convincing argument that $700 billion will somehow solve the problem. Maybe that’s enough. Maybe there isn’t a number big enough to “cure” us. As a good free market guy, I suspect that eventually a lender is going to look at the landscape and think “You know what, it’s a risk, but I think I can make some money here,” loosen a lending guideline, and others will follow.

The truth is that mortgage financing is as available as it’s been all year, and is still FAR more available to more people than it was 10 years ago. Yes, there are more rules and fewer options than we’re used to, and there are “risk based pricing” adjustments, and we’re all about to be on the hook for some $700B in mortgage securities. But for people who can prove they qualify, we still have credit to lend.