“One of the Wildest Chapters in the History of Lending and Borrowing”

James Grant on our current financial situation:

"Since the credit crisis burst out into the open in
June 2007, inflation has risen and economic growth has faltered. The
dollar exchange rate has weakened, the unemployment rate has increased
and commodity prices have soared. The gold price, that running straw
poll of the world’s confidence in paper money, has jumped. House prices
have dropped, mortgage foreclosures spiked and share prices of
America’s biggest financial institutions tumbled…

In that vein, the central bank pushed the interest
rate it controls, the so-called federal funds rate, all the way down to
1% and held it there for the 12 months ended June 2004. House prices
levitated as mortgage underwriting standards collapsed. The credit
markets went into speculative orbit, and an idea took hold. Risk, the
bankers and brokers and professional investors decided, was
yesteryear’s problem.

Now began one of the wildest chapters in the history
of lending and borrowing. In flush times, our financiers seemingly
compete to do the craziest deal. They borrow to the eyes and pay
themselves lordly bonuses. Naturally — eventually — they drive
themselves, and the economy, into a crisis. And to the scene of this
inevitable accident rush the government’s first responders — the Fed,
the Treasury or the government-sponsored enterprises — bearing the
people’s money…

Today’s bear market in financial assets is as nothing compared to the
preceding crash in human judgment. Never was a disaster better
advertised than the one now washing over us. House prices stopped going
up in 2005, and cracks in mortgage credit started appearing in 2006.
Yet the big, ostensibly sophisticated banks only pushed harder."

I don’t buy into everything Grant writes in this OpEd — note the jihad against those short financials or long energy — but there is certainly enough good commentary to spark an interesting debate . . .


In Defense Of Speculators (July 2008)

A Nation of Whiners? No, Just Wall Street Beggars  (July 2008)

Why No Outrage?
James Grant
WSJ, July 19, 2008; Page W1 

Free WSJ / Digg version


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What's been said:

Discussions found on the web:
  1. BG commented on Jul 20

    I agree with everything you have posted here from his OpEd piece – absolutely!

    The thing I can’t seem to get over is the outrageous salaries and bonuses these bastards were getting at the same time they were wrecking the entire financial system.

    Also, it amazes me that we got into this mess with not a single person doing anything wrong! How the hell can we find ourself here with no one being identified as being implicated, complicit or just plain stupid? How can that be? We are here; but, no one did anything illegal? COME ON!!! They should be throwing these bastards in jail at least for fraudulent lending practices. Has anybody gotten arrested for anything???

    They knew exactly what they were doing and what would eventually happen or they would not have been securitizing this shit at such a feverish rate. Don’t listen to what they say. Look at what they were doing! Guilty as hell! They knew full well what was going to happen and even then continued still unnerved.

    Also, the Wall Street crowd has learned that if you are going to go begging, make sure you fuck up badly enough to where you can not be ignored; thus forcing the Fed and US taxpayers to bail you out. The small fry would have to go bankrupt; but, if you FU badly enough, you will be saved. Doesn’t that make perfect sense?

  2. BG commented on Jul 20

    Remember the old style pin-ball machines? Well that silver ball is a good analogy of what “hot money” is doing these days, bouncing around the world from one investment to another.

    By the time regulators identify a problem, the guilty parties have already left the scene and are off to their next conquest.

    Not everything about computerization is beneficial. This is but one negative aspect of speeding everything up.

    The world is now one big spring continually getting more and more compressed.

  3. david foster commented on Jul 20

    It would be interesting to know if Grant was writing anything to forecast these problems back when the “preceding crash in human judgment” was going on but was not yet evident in P&Ls or stock prices. Certainly, very few journalists–and I include business journalists–were doing anything but feeding the flames.

  4. ipodius commented on Jul 20

    It seems intersting that we should seek out blame here and want punishment. Who really is responsible for this mess, especially with the mortgage products and derivatives? Is it the “greedy bankers”? Or, frankly, it is “us”. No one forced anyone to sign for a loan they couldn’t pay, or lie to plump up their income. People were willing participants, and people were willing “dealers” here.

    So while I think that those that participated should lose the results of their actions, I’m not sure that litigation and blame-seeking will provide the ending we all seek. The ending should be better regulation and the notion that regulation exists to protect people from themselves, in a way. I also believe it levels the competitive field. That is the change that will prevent this again. Or at least until it fades from another generation’s view.

  5. mark mchugh commented on Jul 20

    That stuff you’ve got from Grant above is poetry.

  6. Scott commented on Jul 20

    Grant forecast these problems long before they surfaced.

    He wrote time and again about First Fed, Downey, New Century, Nova, did a long series on cdos, starting I think in 2005.

    When John Paulson spoke at his conference in April, he started by saying, Look, all you had to do to make $4 billion last year, or whatever the number was, was read Grant’s and act on it, and he had excerpts from a series of articles, with the dates, as part of his presentation.

  7. Todd commented on Jul 20

    I have absolutely no doubt that all the high level executives at lending institutions were fully aware of the possibility/probability of the massive credit default failure later on.

    I have even less doubt that they were motivated completely by their own greed, what with the incredible short term profits for their companies and the implications for the gargantuan bonuses and salaries they would receive.

    Why is their no talk about the moral hazard of this? And, why can’t their personal assets be seized on the basis that these were ill-gotten gains that were artificially created by the horrendous policies they insituted? I can’t discern very much difference between common thieves and these executives who had the knowledge to understand the systemic risks they posed to us all.

  8. Todd commented on Jul 20

    Ipodius wrote: “It seems intersting that we should seek out blame here and want punishment. Who really is responsible for this mess, especially with the mortgage products and derivatives? Is it the “greedy bankers”? Or, frankly, it is “us”. No one forced anyone to sign for a loan they couldn’t pay, or lie to plump up their income. People were willing participants, and people were willing “dealers” here.”
    I can’t understand how you can look past the predatory practices of these lenders, and place all the blame on the people who signed on the dotted line. These lenders knew that many borrowers are financially un-savvy bordering on financially ignorant. I hold the borrowers responsible for their actions, too, but to give a free pass to the lenders is completely twisted. You underestimate the intensity of their greed, at any cost.

  9. Howard Veit commented on Jul 20

    Anybody but me notice that this is happening AFTER the bankruptcy legislation was passed? Now you really can’t go bankrupt no matter how bad things are for you.

  10. algernon commented on Jul 20

    Grant has it right that the seed for all this is in the triumph of the Progressives:

    “By and by, the lefties carried the day. They got their government-controlled money (the Federal Reserve opened for business in 1914), and their government-directed credit (Fannie Mae and the Federal Home Loan Banks were creatures of Great Depression No. 2; Freddie Mac came along in 1970). In 1971, they got their pure paper dollar. So today, the Fed can print all the dollars it deems expedient and the unwell federal mortgage giants, Fannie Mae and Freddie Mac, combine for $1.5 trillion in on-balance sheet mortgage assets and dominate the business of mortgage origination (in the fourth quarter of last year, private lenders garnered all of a 19% market share).”

  11. Tom C commented on Jul 20


    Thank you. Finally, someone who actually read Grant’s article. If the lefty geniuses who post here could only figure out what is plain, simple moral hazzard promulgated by the easy answers supplied by statists in power!

  12. drey commented on Jul 20

    So Tom C…

    I take it you’re voting Libertarian this November? If so, good for you. If you’re voting Republican you’re the biggest bleeping hypocrite I’ve ever heard, my man.


  13. Mark E Hoffer commented on Jul 20

    Group, bulk and gift subscription rates are available on request. Call 212-809-7994, for more info.

    Subscriber Benefits
    Hard copy and online editions Every subscription to GRANT’S includes a copy that is mailed to you as well as complimentary online access. There is no difference in content between the print and the electronic editions. All subscribers to GRANT’S can also enjoy GRANT’S online archive – a treasury of past issues.

    Even his website isn’t FOS

  14. Tom C commented on Jul 20

    So, drey… wtf? Do I know you? Who you voting for?


  15. gina commented on Jul 20

    It helps if you outright own the government and the “regulators in in witness the revolving door between business and the political appointments from the press on down
    almost time to fix the mess ,,when the people wake up to the facts it might get messy

  16. Jeff commented on Jul 20

    Tom C:

    Good luck trying to lay the blame at the feet of the “leftists” this year. Bottom line is the GOP is going to get trounced in November. People are starting to see how the GOP’s idea of “free markets” really works – free for the wealthy and connected to make money and free for the rest of us to lose money and pick up their tab when their unbridled greed causes market chaos.

  17. m3 commented on Jul 20

    Grant has it right that the seed for all this is in the triumph of the Conservatives:

    “By and by, the righties carried the day. They got their corrupt neocon-dominated congress (who added trillions to the national debt through expansion of medicare, war, so-called “homeland security,” and unfunded tax cuts), and their corrupted republican president & vice president (bush jr. was an oil man, and cheney was a former exec of halliburton, who both removed hundreds of millions of barrels of iraqi oil exports from world supply by bombing the nation into oblivion). In 1999, they got their purely deregulated financial market by repealing Glass-Stegall. So today, the banks can LOSE all the dollars it deems expedient, and destroy the the economy and the federal reserve’s balance sheet, and devaluing the dollar 40% with no end in sight.”

  18. RW commented on Jul 20

    Anodyne for the increasingly dated, conservative-libertarian blame-the-socialist/lefty/liberals-for-everything-evil polemic may be found at http://tinyurl.com/4hs649

    And help resisting the virus that conservatives-really-do-favor-the-market-over-government-meddling is available at http://www.conservativenannystate.org/

    Na zdrovyeh

  19. Matthew Rafat commented on Jul 21

    We need some history to reflect on what’s really happened. In the olden days, when William Jennings Bryan railed against the gold standard, he wanted *more* inflation and more loans, because his farmers were already in debt, and their customers didn’t have money to buy their products/produce. This double-bind meant the farmers were not getting paid, and their debt was increasing. By advocating more inflation, the value of the farmers’ debt would be reduced and more people would have money to buy their products, breaking the debt cycle. Thus, Bryan wanted exactly what we had from 2002 to 2007–easy money.

    Lost in all the reporting on the financial crisis is the unprecedented access to money the poor had, leading to a small window of opportunity to escape a lifetime of low hourly wages. As Bryan discovered, easy money helps the poor when compared to having no money. Easy money allows the poor to buy homes. Easy money allows the poor to open a small business. Easy money helps the poor, who get greater access to new jobs created by the influx of new money to spend. Easy money hurts the rich, who see their savings reduced by inflation. In a stunning reversal that would have made Marx proud, shareholders–thought of as rich–took the hit along with the poor. The problem, then, wasn’t easy money–it was financial mismanagement and greed on all sides. Such factors make it harder to get outraged. At the end of the day, we’ve reaped what we’ve sown.

  20. Tom C commented on Jul 21

    Jeff- This isn’t a ‘left-right’ issue. It’s a moral hazzard issue. Both parties are now statist parties. The institutions in place are relics of the progressive era. The assumptions behind those institutions are ‘progressive’ assumptions and they are mistaken. 110 years later those institutions are imploding. If you think the mortgage gse’s create a moral hazzard problem for the dollar, inflation and the banking system wait until SS and medicare blow up.

  21. Mark E Hoffer commented on Jul 21

    “Thus, Bryan wanted exactly what we had from 2002 to 2007–easy money.”


    there is a big difference between ‘Free Silver’ and ‘Free Wallpaper’..

    at least Bryan’s position of ‘Easy Money’ was an accurate term, today, there isn’t any Money in circulation..

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