Banking Law

An article in the December 1 issue of The New Yorker entitled "Anatomy of a Meltdown" contained some interesting--some might say shocking--admissions by Ben Bernanke about how befuddled he was about the onset of the current financial crisis. Paul Jackson at Housing Wire is befuddled by Mr. Bernanke's befuddlement, and is appalled by this statement of Bernanke's: ???The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict.???

It may have been "very complex," as Bernanke suggests, but the current crisis was by no means "difficult to predict." And anyone selling that line of logic now misses the myriad of voices that wrote in detail about this mess well before it took place. A very basic shift in economic awareness has taken place as the crisis has worn on; nearly everyone has, by now, been introduced to the originate-and-sell model of mortgage securitization, the engine that provided liquidity on a global scale (and reached well outside of the housing sector, it should be noted).

But I can recall in late 2006 hearing economists pontificate that the "subprime mess will be contained," blissfully unaware of just how embedded mortgage financing had become into the economic and broader financial markets. And, frankly, there is simply no excuse for that sort of oversight; understanding the economic landscape is their primary job, for God???s sake. The size of the bond markets geared towards mortgages alone was/is beyond substantial. The idea that problems in that market could resonate throughout the entire system should not ??? I repeat, NOT ??? have been a surprise to anyone.

Least of all the guy that is now being painted by his peers as "the smartest guy in the room."

Here's Paul's basic point:

The bitter truth ??? the pill that no regulator wants to swallow right now ??? is that most economists and regulators were asleep at the wheel. The idea of self-regulation permeated the environment, perhaps thanks to Greenspan, sure. But even if regulators had decided to clamp down on what was happening, they would have had to at least have some idea of what was actually taking place.

The picture being painted in the rearview mirror now suggests a far worse transgression than a policy misstep: it suggests that key regulators and economists understood little about the secondary mortgage markets to begin with. The reason so few in the financial markets saw this coming is because so few actually understood either how the market was structured, or how far it really reached. And that, to me, is far more troubling than a debate over regulatory ideology and course.

They didn't understand the secondary mortgage markets then and they still don't understand them (if my e-mail is any indication). Yet, that hasn't stopped them, and won't stop them, from creating and implementing all sorts of "solutions" to "solve" the crisis and "ensure" that it never again occurs.

You ever feel like you're in the passenger seat of a 1967 Chevy Malibu convertible, the top down, racing through the Nevada desert under the glare of the noonday sun at over a hundred miles an hour, the radio blasting Creedence Clearwater Revival's "Run Through The Jungle," swigging a half-empty bottle of Jack Daniel's Black, head about to explode, and you look over at the driver and see it's Hunter Thompson about to take his third hit of acid? Me, too.