Wednesday, January 26, 2011

Financial Crises Past And Yet To Come

Americans need to steepen their learning curves.  We should have seen the last crisis coming:

The commission that investigated the crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans.

Drivers were asleep at the wheel.  Our international critics are no more lenient, even at those institutions founded and controlled by the U.S.  The IMF gives us further warnings:

“An overhaul is needed of the U.S. housing finance system,” including the government-controlled mortgage companies Fannie Mae and Freddie Mac, the IMF said. “The authorities should not delay efforts to create an action plan for the future.”

It normally only gives such warnings to emerging economies.  Such an assessment does not surprise given the lack of results from a populist approach to fixing mortgages:

The U.S. government may turn a profit on its most controversial bailout programs but ordinary Americans, particularly struggling homeowners, are still not benefiting, a bailout watchdog said on Tuesday.

The real solutions require home foreclosures, bank insolvencies, balance sheet wipeouts, executive terminations, and reduced consumption.  We have avoided much of this so far.  That is why we will not avoid the next phase of the financial crisis.