September 28, 2007
SAFE AS AMERICAN HOUSES:
Capitalism does work (Chan Akya, 9/29/07, Asia Times)
The most recent episode in US financial markets will be mulled and studied for a long time after all Asian banks - commercial and central - fess up to their losses. While the average Western newspaper appears to blame Wall Street investment banks for the mess, they are barking up the wrong tree as usual. It is not the rapacious capitalists on Wall Street who are to blame, but rather the currency-manipulating Asian central banks. The fault lines of the current crisis thus lie in the antiquated policies of Asian central banks that defy the basic principles of capitalism or even enlightened self-interest.
By stoutly defending their currency pegs to the US dollar well past the intended turnaround in current-account surpluses at the end of the 1990s, Asian economies in effect assumed a subsidiary role to US requirements. A ready supply of investments from Asia meant that pretty much "acceptable" security could be sold down, often well below the returns that prudent economic agents would demand.
Asian central banks invested primarily in debt, and were bound by historically inspired mandates of asset quality that relied much on the rating agencies such as Standard & Poor's and Moody's. Profit-seeking agents (or normal human beings to you and me), in this case Wall Street bankers, rightly then provided the service of combining the willing lender with those that America's own banks would not touch with a barge pole, namely the subprime borrowers. Long considered too risky by mainline banks, the borrowers suddenly presented other market folks with exactly the right opportunity, namely the generation of new mortgages, securities on which could be sold to Asian (and European) banks.
I am under no illusion that it was Asia's voracious appetite for such debt instruments that lies at the heart of the mess. Look at the deal that the average burger-flipper in America's heartland got: with a minimum-wage job or two, you could qualify for a largish mortgage that could buy the house of your dreams. True, you had to make mortgage payments (which the government deemed tax-deductible, in yet another assault on the free market) but there was always the chance of selling your house to the next chap for a big profit. The stories of many such new millionaires inspired millions to join the grand scheme. As market returns always fall when trades get crowded, so too did this little scam end, with house prices tumbling across the United States and people facing foreclosure.
Two pretty basic realities make this a phenomena that won't end anytime soon: (1) much of the world's population lives in countries with fairly dismal futures, so it makes good economic sense for them to invest their money in America, not at home; (2) even setting aside the brighter future generally in America, when you consider only the housing market you bump up against the fact that we need to find places for another 200 million people to live over the next 40 years and borrow the money to build and buy those homes. It's a win/win situation and those are more impervious to change than the valetudinarians care to recognize. Posted by Orrin Judd at September 28, 2007 7:44 AM