A new book by the economists, Atif Mian and Amir Sufi’s House of Debt, represents an important addition to our understanding of the events of 2008, as it persuasively demonstrates that the conventional meta-narrative of the crisis and its aftermath, which emphasises the breakdown of financial intermediation, is inadequate. It then goes on to provide a supplementary and, in some ways, alternative explanation focusing on the deterioration of household balance sheets, an analysis that has profound implications for policy directed both at preventing crises and responding to them when prevention fails.
They argue that, rather than failing banks, the key culprits in the financial crisis were overly indebted households, rather than the financial crisis per se, the banking blowups coming as a consequence of households no longer able to service debts, which were held on their personal balance sheets in the form of toxic CDOs.Macrobits by Marshall Auerback
This is true if one looks at the events which actually precipitated the events of 2008. But the analysis has to be grounded in a longer term perspective to ask why this household debt built up so rapidly....
‘House Of Debt’ Adds To Our Understanding Of 2008, But Not The Solution
Marshall Auerback
Tom,
ReplyDeletesome confusion between the Auerback excerpt you show, and one by Lawrence Summers at the FT:
House of Debt is important because it persuasively demonstrates that the conventional meta-narrative of the crisis and its aftermath, which emphasises the breakdown of financial intermediation, is inadequate. It then goes on to provide a supplementary and in some ways alternative explanation...
http://www.ft.com/intl/cms/s/2/3ec604c0-ec96-11e3-8963-00144feabdc0.html#axzz33fceoNK2
Also, something wrong with the link.
Thanks, Art. Link fixed.
ReplyDeleteI'm getting a "Not Found"
ReplyDeleteHmm. Strange. Worked when I checked it.
ReplyDeleteFixed again. Works of me.
So when a financially astute bankster / liar / fraudster foists a NINJA loan on to a relatively uneducated householder, the householder is the “culprit” to quote from the above passage? Sorry, but I don’t buy that. The fault lies with the SYSTEM that lets banks grant silly loans while promising banks that the taxpayer will rescue banks when it all goes wrong.
ReplyDeleteOne solution is full reserve banking. Under FR, depositors who want their money to be loaned to CHOOSE what it’s loaned on for. If they want to fund safe mortgages, they can. And if they want to fund NINJA mortgages, they can. But if the latter goes wrong, the relevant depositors foot the bill, not taxpayers. Moreover, when it goes wrong, the bank as such doesn’t go bust because relevant depositors have footed the bill.
Full reserves is a too-clumsy response to liar's loans.
ReplyDeleteJust regulate the damn underwriting process. Don't arbitrarily cap the absolute allowed amount of Public Fiat expressed per unit time.
Only result of Full Reserve is reduced public agility, which is a tangential issue to fraud.
Anyone who can't separate those two issues lacks imagination, and hence cognitive agility.
Roger,
ReplyDelete“Just regulate the damn underwriting process.” The problem with that, i.e. making ALL LENDING relatively or ultra-safe, is that it stops risky loans being made, and risky loans are perfectly OK with advocates of free markets (like me) just as long as taxpayers don’t have to bail anyone out when those loans go wrong.
And that’s what full reserve achieves: under full reserve ANYONE is free to have their money loaned on in any way they like, but under no circumstances do taxpayers rescue the failures. You may remember that a trillion of public money was recently used to bail out banks.
And if we’re into fancy phraseology, then you’ll appreciate that full reserve actually promotes “public agility”. Oh, and anyone who doesn’t understand the above “lacks cognitive agility”. (Fancy phraseology doesn’t impress me, as you’ve probably guessed.)