The Liqudity Crunch Blame Game

The Liquidity Collapse Spin Blame Game

Recently Aimee Waltz, a former loan officer of the now defunct American Home Mortgage, talked on National Public Radio about her belief that the borrowers of sub-prime loans were the cause of the collapse of the US mortgage market. “They should have known that they couldn’t make those future loan payments,” she said firmly. Now let’s think about that statement. Who is in a better position to know whether someone is capable of making a future loan payment? The optimistic buyer who thinks that they will get in the real estate wealth band wagon and flip the property for huge profits or the mortgage company that is supposed to have the loan savvy to qualify an applicant and understand the risks involved.

The plain fact is that the mortgage industry helped create the bubble and then perpetuated it via the fallacy of unlimited asset appreciation. The managers of these mortgage companies are the ones who are expected to understand the risks inherent in the market and produce strategies to reduce risk. It is not the borrower who should be blamed.

Managers of these loan corporations knew the inherent risks and they overlooked them because as the real estate bubble unfolded there was more risk losing potential business and profits than being wrong about making sub-par loans. Everyone was doing it and we have to too or will be behind the earnings and growth band wagon. Meaning at some point the bean counters told their loan company managers the risk involved with continuing to overlook the possibility of a market collapse. Most loan companies new far in advance of the actual market liquidity problems that they were in serious trouble.

The Federal Reserve must also take blame for not raising interest rates soon enough. Raising rates may have cooled the real estate market and put a short term brake on unwarranted price appreciation enthusiasm. I fear that the Bush administration put the kibosh on any thought of reducing rates. Their ability to put political pressure on just about everyone has been well documented.

The real estate appreciation game kept the economy moving early in the Bush administration as consumers felt “wealthier” and that kept them spending, and the economy going. The Federal Reserve is supposed to notice when markets become stretched and when to draw in the purse strings. They missed the real estate bubble or chose to ignore its potential for folly perhaps due to the presumptive fear of arousing the wrath of the White House career dismantling SWAT squad. It is interesting how Greenspan snapped up his walking papers before the liquidity crunch. Did he see it coming? Although he would not admit it, you can bet he did.

The spin blame game will continue far into the near future as the market unravels. However, the Federal Reserve and perhaps the Bush White House has earned the right to be at the top of the blame game food chain not the lowly citizen borrowers. If anything consumers should be at the bottom of the blame chain. Over stretching borrowers may be guilty of greed and chasing the American dream, but isn’t that what they are supposed to be doing in the first place, being good little capitalists? Take some responsibility and see the entire picture. Don’t be a political hack and sell yourself short by blaming the food chain plankton of the real estate liquidity blame game, the sub-prime borrowers themselves. Put the blame where it squarely belongs, on the doormat of the Bush White House.