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December 6, 2007
Fixing the subprime mess
It looks like Treasury Secretary Paulson has beat back the laissez faire skeptics (the inheritors of Hoover's Treasury Sec Andrew Mellon whose response to the Great Depression was to let the economy "purge them all") and has won Presidential support for his plan to help subprime mortgage borrowers (see Bush to Unveil Aid to Homeowners - WSJ.com, Lenders Agree to Freeze Rates on Some Loans - New York Times, Bush mortgage plan would freeze rates - Los Angeles Times, Bush Wins Agreement To Freeze Mortgages - washingtonpost.com).
Great, you say. But what has this got to do with intangibles? Simply this: if we can't get a handle on the home mortgage lending problem (one of the most tangible of tangible assets), how are we ever going to expand lending on intangibles? The problem is systemic to the financial system right now. As WSJ columnist David Wessel points out:
For years, banks and investors lent freely. They took big risks for surprisingly little reward (known as "low risk premiums" in the patois of the trade). Now, they're shunning risk. Big banks are reluctant to lend even to each other for more than a few days, and are hoarding cash.
. . .
Leverage is defined as the factor by which a lever multiplies a force. In economics and finance, leverage allows the bold to borrow to make bets that can pay off handsomely when times are good. But leverage magnifies losses when things go bad. So borrowing binges are followed by periods of deleveraging in which lenders and investors borrow less and take fewer risks. Economists dub the recent decades in which recessions were scarce and inflation calm the Great Moderation. That seems to be giving way to the Grand Deleveraging.
At best, the economy has a hangover, and will feel better in a couple of months. But this may be more like a case of mono, an ailment in which the patient doesn't return to normal vigor for a lot longer.
Until we get through the Great Deleveraging, advances in monetization of intangibles may be on hold. But we may be in a position to put in place the infrastructure and the public policies needed for the next expansion -- learning from the problems of today.
It is often said that it is too late to fix the roof when it is raining. But the rain shows you where the hidden leaks are. You just need to be prepared to get out the ladder as soon as the rain stops.
Posted by Ken Jarboe at December 6, 2007 9:41 AM
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