The faux-prosperity of the last decade was largely the result of a
wholesale credit system which created a humongous amount of credit via sketchy
debt instruments, off-balance sheet operations, massive leverage and
derivatives. (The Fed's liquidity and conventional bank loans play a very small
part in the modern credit system) Securitization--which is the conversion of
pools of loans into securities--is at the center of the storm. It formed the
asset-base upon which the investment banks and hedge funds stacked additional
leverage creating an unstable debt-pyramid that couldn't withstand the battering
of a slumping market. After two Bear Stearns funds defaulted 20 months ago, the
securitization markets froze, credit dried up and the broader economy went into
a tailspin. Now that investors know how risky securitized instruments really
are, there's little chance that assets will regain their original value or that
the market for structured debt will stage a comeback.
Thursday, May 21, 2009
Faux-Prosperity Is Not Returning
This paragraph by Mike Whitney, describing the securitization process underlying the debt bubble of the last decade, shows why our economy may be resetting at a new, lower 'normal', rather than recovering to the 'happy days' of the last ten years.