Well, I've been doing my best to follow along with the inanities and insanities all too obvious in the U.S. and world-wide financial doings. It hasn't been easy. I had to figure out what CDOs were. Then I had to figure out what SIVs were. The latest effort has been to understand what a monoline insurer is. It turns out - the so-called "monoline insurers" - aren't. They used to be, but they grew tired of doing the slow, steady, but safely profitable business of insuring local (and state) government bond issues, and branched out into insuring the above-mentioned financial exotica such as CDOs and SIVs. Big Mistake.
Here's the problem in a nutshell, which is a perfect descriptor of the people in charge of these financial institutions. Since the "monoline" insurers had for many, many years run safe, profitable, boring businesses insuring munis (local and state government bonds), they had earned AAA ratings from the rating institutions such as Standard and Poor's, Moody's, and Fitch's. Now, often the bonds they insured were from fairly small, unknown agencies which could not have had a AAA rating on their own - not because they were particularly unsafe or poorly run, but simply because they were too small and/or unknown to garner such ratings.
Those munis couldn't get AAA ratings on their own, but if they paid for the insurance from the monolines, they could receive the monolines' own AAA ratings, thus selling their bonds for a lower interest rate than if they hadn't received the monolines' AAA rating. Even though they had to pay the monolines for the high ratings, they still came out far ahead on the deal. Well, the monolines were very safe, and so the whole thing made sense. But then the monolines got into the business of insuring those sliced, diced, and (as it turns out) extremely risky mortages known as subrime, a.k.a. "liar loans" (stated income, i.e., the borrower stated his income and no one bothered to check) and NINJA loans (no income, no job, or assets). So now, as those risky CDOs and whatnot are becoming rather obviously not worth nearly as much as their originators claimed, the monolines are seeing their financial positions coming under a great deal of financial pressure. It gets worse...
Many investing agencies which hold bonds are required to hold only investment grade bonds. So they hold a lot of those AAA-rated munis - the AAA rating often being due to the umbrella effect of the monolines insuring them and lending them the monolines' own AAA ratings. But the fly in the ointment is that if the monolines lose their own AAA ratings, due to their financial difficulties arising from their insuring the various (now obvious) junk paper from the real estate fiasco, all those munis that only have AAA ratings because of the monolines' AAA ratings will necessarily lose their own AAA ratings. So then the bond-holding agencies which are required to hold only investment grade bonds will have to sell them. It shouldn't be too difficult to understand what would happen to the muni bond market if the above were to come to pass - which is why various politicians are furiously trying to come up with a quick solution to the problem.
The thing is - there is no quick solution. The problem is so convoluted that it is nearly certain to simply spin out of control, landing in a giant heap in some poor farmer's field in Ohio or some such God-forsaken place. The muni bond market is already being severely disrupted merely by the possibility of the above occurring. Bond interest rates are far higher than they were a year ago, despite the Fed's lowering of their interest rates.
As for the housing market - well, that continues to deteriorate, and probably will only get worse and worse. It could be many years before the declines stop - let alone before prices return to where they were in 2006. Bubble markets are like that. The dot com mania is dead and shows no signs of returning to life. The price of tulips in Holland never recovered to their absurd levels after that mania died. Housing will once again become a cost - not an investment asset. Welcome back to reality. We've missed you.
Finally, let's take a short look at the underlying, essential, basic problem. Our money is based on debt. Our debt is money and our money is debt. There is no (or at least very little) net-net money - money that someone has and is not at the same time owed to someone else, by someone else. Such a monetary system is highly vulnerable to credit contractions, credit crunches, and the unwillingness of borrowers to borrow. When those things happen, the money supply contracts and the economy goes into the crapper. The only way to avoid that is to use money that is based on assets instead of debts. Such money does not, as one wit put it on CNBC, go to money heaven. But in order to have such an asset-based monetary system, the politicians and financiers would have to be willing to give up their control of the economy and the money supply - which currently they can rather easily manipulate to their advantage. They aren't going to do that, so we are going to be stuck with the periodic inflations, deflations, booms and busts. What we are seeing now in the financial markets is what we will continue seeing periodically, forever. The dream of a well-managed economy, free of booms and busts, free of inflation and deflation, is just that - a dream - a myth - a dangerous hoax. The sooner we gave it up, the better off we'd be. But so many of us have been led to believe that it's possible, that the New Deal really did "cure" the Great Depression, that the modern managed economy really is the very best we can do, that there is no prospect at all of our awakening. None.
