12 July 2009

Letter from Lhasa, number 111. (Brummer 2009): The Crunch

Letter from Lhasa, number 111. (Brummer 2009): The Crunch

by Roberto Abraham Scaruffi

Brummer, A., The Crunch. How Greed and Incompetence Sparked the Credit Crisis, Random House Business Books, London, UK, 2009.

(Brummer 2009).

Alex Brummer

It is not question of law of profit, as populist vulgata perhaps loves to claim. It is question of frauds with “the system” allowing them, until some intervention be finally inevitable at least for self-justifying in front of the popular masses, the so-called “public opinion”. The revenues of these frauds do not magically disappear. In the process, a lot of people earns and perhaps a lot more suffers, eventually heavy, losses. For instance, real estates do not disappear as well as the money paid for them. Money, eventually, moves to different pockets.

Certainly, the following economic depressions or prosperities are not imaginary. Finance is a key element of “the real [material] economy”.

Magically, a new business was invented: to sell real estates and the relative mortgages to people could not afford them. Companies expanded. Others were created. People were hired. New financial products were invented on this new business. Careers of professionals, of charlatans and of both were founded on it. It was not even a true new business. The traditional mortgage business was extended to who could not afford real estates. However, everybody was doing that. It seemed silly not to exploit the new chance. Could a manager let his shareholders without the additional and abundant profits of the new business? Could a sub-proletarian not to exploit the possibility to buy a house in some convenient area? “Sign here and everything will be all right!” “You could not afford it?! Resign here, even for more, and it'll become magically affordable for you and your family.

“But the sub-prime boom was not solely connected with the poor who were previously unable to get home loans. Brokers also found rich pickings in equity release among the working classes who had already achieved homeownership. These owner-occupiers were persuaded that they could raise cash by refinancing their homes. As ever, it was not fully explained to them how the 'teaser' rates worked.

“With the banks cashing in on sub-prime, it was small wonder that many Americans wanted to get in on the act. It was a bonanza that swelled the ranks of the lenders, as the man and woman in the street sensed 'pay dirt'. At one point the boom was so great that people with no banking qualifications or lending experience were joining in. (…) Between November 2001 and April 2005 housing and housing-related industries created an amazing 788,300 jobs across the US – 40 per cent of the total increase in employment during a period of sharp growth.”

(Brummer 2009, p. 23-24)

Too many poor people were induced to subscribe mortgages they could not repay. Only guarantees were the real estates they were buying. Their salaries were, frequently, even inferior to the installments they ought to pay or, anyway, clearly inadequate to the financial burden they were subscribing. These mortgages were transformed in financial products, with other additional broader effects. “It was what the banks did with the sub-prime loans that caused a financial crisis that spread far beyond America's shores. Regulators were reassured that because these sliced and diced, bundled up, sold-on loans were reaching right across the financial system there was no general risk to global stability. But the loans would become the second main link in a chain that not only brought about a crisis in the US property market but also led to the international credit crunch.” (Brummer 2009, p. 35)

How that could happen? “Sub-prime mortgages had been disguised as first-class assets and, best of all, yielded far better returns than quality debt.

“After all, it was the banks that paid the credit rating agencies, not the consumers and investors they were meant to protect.”

(Brummer 2009, p. 38-39)

“On 9 August [[2007]] the system appeared to be broken.”


“The first public signs of serious distress had come a week earlier, on 2 August, when three German banks revealed severe problems arising their exposure to sub-prime loans.”

(Brummer 2009, p. 57)

Everybody knew it ought to happen. However, everybody was concerned with the today advantages and hoped the inevitable tomorrow never rose. Salaries, benefits, profits etc were distributed... The machine was running.

Regulators were unwilling or incapable to do anything. They could. De facto, they did not do. “In the case of sub-prime lending and the credit crunch, the regulators failed so miserably that serious questions have to be asked about their role: their alertness, their responsibilities and the way they performed. Warnings about the credit risk and lack of liquidity were certainly available, but there was a leadership vacuum, and no one was willing to assume control and take the harsh disciplinary action that might have restrained the worst excesses and calmed the market.” (Brummer 2009, p. 110)

Economic depressions, crises or cracks periodically happen. It is physiological to the modern (alias capitalist) economic system. It would be extremely complex, perhaps impossible, to calculate a trade off with what would have happen if the “crazy machine” had been immediately repressed.

What happened had and is certainly having redistributive effects. If sub-proletarians and proletarians, or also middle classes, were illuded they could afford what they could not, other ones, in part the same ones, benefited from the running “crazy machine”. We do not want to tell that it was a zero-sum game. We have no element and we have done no research for asserting if and where there were, at macro-class level, earnings and losses. Economic and social effects are generally less simplistic than presented, before with the [easy] mortgage fashion, now with the mono-criminalization of the mortgage bubble.

Brummer, A., The Crunch. How Greed and Incompetence Sparked the Credit Crisis, Random House Business Books, London, UK, 2009.