The Sub Prime Fiasco

Another global economic crisis. Every time the engines of capitalism cough, sputter or stall I think back to a conversation I had at university with a bow-tied economics graduate student who insisted that his academic discipline was a science. New economic theories, he claimed, made forecasting of profit and loss as predictable as anything that physics or chemistry could offer. Amazing.
Yet recently we have come to learn that every major financial institution in the western world and half of the far east all somehow failed to grasp the idea that if you loan money out at a rate of return lower than you yourself borrowed the money, you might end up in a bit of trouble. The economic gurus with advanced business degrees and enormous salaries somehow missed the same crucial point that the poor sods who borrowed the money did: When the sub-prime grace period on the loan expires and the interest rate goes up to normal levels, the poor borrower will no longer be able to afford it! That’s why he hadn’t borrowed the money at the regular rate in the first place! Then when the economic downturn that everyone has been predicting for four years occurs and those borderline borrowers are laid off…oops! One begins to see long rows of For Sale signs on houses that are now worth less than they were purchased for. The bubble bursts; panic ensues; and, like rats from a sinking ship, investors try to abandon the market.
It appears that every bank from the First National Bank of Ottumwa, Iowa, to Citibank, Chase Manhattan, and RBC neglected to predict the obvious. These fiscal visionaries missed what my neighbours Carl, Walt and Larry had been forecasting for months. My barber talked about it with me last March, and my 92 year old father had, as early as 2006 shaken his head ruefully at what he knew would be inescapable financial havoc.
Listening to the same economists, gurus and sooth-sayers now, provides one with a typical grab-bag of doublespeak and learned bafflegab. It was, they say, a completely unpredictable combination of various economic elements, an unusual configuration of unfathomable indicators, a perfect storm of coincidental world-wide negative factors.
Horse hockey!
The only thing worse than believing that they should have known but didn’t is believing that they knew and didn’t care, that greed and ambition made the movers and shakers lower rates to absurd levels in order to keep the economic engines running as long as possible in order to wring out as much profit as they could for as long as they could. But believing that would be just too cynical. Still, I wonder if there are any CEOs of banks or investment firms losing their houses. I can’t help but think probably not.

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