Tuesday, July 14, 2009

Chicken Or The Egg?

What came first:

Easy Credit or Housing?

Well...Lets see long before the collapse of housing, collapse of the sub prime market, collapse of Lehman and others, we had cheap rates.

The answer here is always Easy Credit. Easy credit brings excessive risk taking, creation of complex derivatives, which leads to excessive leverage, then BOOM.

Too much excess capital swimming around looking for balloons to inflate.

I was thinking about this, was it Wall Streets fault that Americans cant live within their means? Wall Street created complex products because there was tremendous end market (Consumers) demand for easy credit. People needed to buy cars every few years, needed to buy that 50 inch Plasma, the 2nd Vacation Home in Aspen, all of this type of lending was created so that Americans can live the good life.

Just think - What would congress say, if Wall Street suddenly stopped creating mortgage products in 2001? There would be public outcry against the financial community, Nancy Pelosi and Charles Rangel would be on the warpath, screaming that Wall Street is not making it possible for the American Dream to be realized for consumers.

I am not defending Wall Street, the shenanigans are absurd, but they exist because 2/3 of GDP wanted it that way for 30 years!


  1. Agreed, you can't defend Wall Street but there was no other publicly acceptable alternative. We needed 3 cars for our 2 driver family (I was one of those people, I'll admit), we needed new PCs, new iPods, a bigger house to keep up with the Jones', the apartment for the mistress, Vicodin and jewelry for the wife, etc...

  2. Just imagine.
    If Americans saved just 10%
    If Americans didn't consume as much
    If Americans didn't buy everything in sight in triplicate.
    That GDP was just 40% of consumer spending.

    Its simple supply and demand dynamics
    If you don't do crack....there is no need tor have a crack dealer in your vicinity.
    The reason Wall Street exists is to enable the excess of society.
    This is a total failure of America in general...Not just Wall Street.

  3. A little covetousness has gone a long way. But like you and I just said, the machinations on Wall Street are necessary to an extent. Greenspan, Rubin, Gramm, Schumer and all these guys stumping for GS, MS and others to prevent regulation prevented this growth from being manageable and made it bubble-like. Instant gratification reared it head and bit us on the ass.

  4. Goldman created a situation where it knew it can create tranches of sub prime backed debt and then sell it because the ratings companies were in their pockets. If you ask me the shit storm should fall on the Ratings agencies, they are truly the ones who let everyone down. You cant blame the consumer, we are only doing what we know best, consume, Greenspan policy of lower rates fixing everything just didn't happen this time. Like the Pats Vs,.The Giants, the luck ran out.