Who can forget the summer of 2008. It brought about changes most of us had never seen before. The mortgage securities markets collapsed under the weight of the derivatives domino effect. Today we have heard much about what happened and why. It has evolved into a political event now with the blame game in full force. However, there are still a couple of areas that aren’t talked about in the midst of all the blame being passed around.
One is the half a trillion in money market withdrawals that occurred during mid September of 2008. The exact number is disputed. There was a bona-fide electronic run on the banks underway that was stopped by the feds when they suspended trading. Speculation was that maybe $2 trillion or more would have been taken off the books if they had not intervened. As of today, we still haven’t been told who was behind it and why. This was, in fact, THE trigger that caused the financial markets to melt down and led to Paulson ramming TARP down our throats. Much discussion has taken place involving the mortgage market business since then. Yet no one talks about the trigger. No Congressional investigations or inquiries at all. Just swept under the rug.
A second area that isn’t discussed is because it’s a theory of mine. There is a reason that the mortgage industry was on such thin ice to begin with. I mean, the derivatives markets were nothing new. The federal government has intervened at various points along the way to act as an enabler and foster the growth of these markets and their risky trades. So what happened in 2008 to allow that first domino to topple? Two things, both commodity related. The price of oil which gave us our gallon of gas exceeding $4 was one. The other one I never hear discussed and that is the ethanol mandate issued under Bush. This caused the price of corn to skyrocket. We then found out just how many products contained either corn or oil. It’s an astonishing number. This one-two punch of high commodity prices put a serious dent in most Americans disposable income. We were spending a much greater percentage of our paychecks on food and gas. So much so that it was causing many of us to start skipping house payments. I mean, we’re going to eat and drive to work first and worry about mortgage payments later. Just human nature. And there you have it. Get enough homeowners to miss a few payments and the entire derivative chain collapses.
So, the blame Bush brigade can take a measure of success here. He did, in fact, sign the ethanol mandate that helped set-up the thin ice of that summer. However, I believe this only served to speed up the process. The entire derivative market is based on the theory that housing prices would always continue to appreciate. The value of your home keeps rising and you comply by taking out more home equity loans. You then spend that money on whatever and it keeps the economy expanding. Apparently, we have enough short-sighted idiots running the show that bought into this notion that the gravy train would never end.
So that’s it in a nutshell. Government opened the can of worms by creating the derivatives market. High commodity prices forced people to fall behind on their house payments and the financial markets collapsed because they are so integrated across the board in the investment business. Did a group of investors realize the impending disaster and attempt to withdraw from the market all together at once? Don’t know and nobody’s talking. Or looking. Why is this so important? Look around you and read the tea leaves. Commodity prices are again on the rise in tandem. The government is actively attempting to stall the foreclosure market. They are still rolling out programs designed to keep people in homes they can’t afford because the jobs market is toast. We are seeing the same storm clouds on the horizon and not doing anything about it. Most economists dismiss a double-dip recession. The Obama administration is making every attempt to skew numbers and try to show his policies as being beneficial, particularly with an election around the corner. The ingredients are all there. We just don’t know when or what the trigger will be this time. Hold on tight!
Great post and some interesting theories.
I think all these issues can be solved by one simple idea: Get the government out of the markets. The more government intervention in the markets to protect one group or another (to make things “fair”) the more they screw things up and in realty hurts everyone. There are always going to be winners and losers. Its life. But what the government is doing is hurting us all, and dragging all of us down.
And the sad part is that there is a long, proven track record of this futility, yet certain segments of our society just blindly plod along indifferent. And then other segments actively pursue government intervention well aware of this, but prefer the personal gain from the power trip. I know not every politician is crooked and in this camp, ala Ron Paul, but far too many are. We, the people, always pay the price. Thanks Steve.