A debacle of unbelievable dimensions

It's impossible to tell whether the stenographer was having a bad day or if former Fed Chairman Alan Greenspan was the one who was a bit off - it was probably a little of both.

In his first interview since the recent world-wide equity market turmoil, the Maestro spoke with Sherry Cooper, chief economist at BMO Nesbitt Burns Inc. before an audience of 1,500 in Vancouver. The entire discussion as well as a summary report are available online at The Globe & Mail.

On the recent stock market decline:

I think that what is not the issue of, for example, the level of liquidity the number of related issues, but the fact that a very small niche of the American housing finance system, the subprime market, became collateralized and securitized and ended up with an extraordinary and very surprising level of outstanding mortgage-backed securities backed by subprime mortgages. I suspect, although I must admit I can't prove, that if there were never any collateralization of those securities issues specifically, I think that the level of originations of subprime would have been much lower because remember they were a very small segment of the market until the tail end of the housing bubble. And as you can see in retrospect, we couldn't really judge at the time was that the original subprime were securitized, they weren't subprime and therefore had very, very high rates of return on them but at that point in the ... United States rising you had an odd situation where the issue of foreclosures or ... was actually quite low extraordinary so-called margin of types or instruments. The demand for them, the hedge funds, pension funds, and everybody else looked to be an exceptionally high return, exceptionally low risk, became extraordinarily large the say hedge funds puts pressure on the ... basically the investment bankers in the United States, and the security returns to the lenders say ‘we need more paper' and what they basically did, they said to the lenders effectively - although I'm sure contracts are involved - is whatever you can get we will take to securitize and the underwriting standards collapsed. I mean, the amount of egregious action was quite extraordinary.

WTF???

After a couple passes through the above hairball, no suitable candidates for emphasis could be found. Loosely paraphrasing William Hurt's character in The Big Chill, "Sometimes you just have to sit back and let The Maestro wash over you."

On the benefits of subprime lending:

Remember one aspect of the subprime mortgage is that it financed a very significant increase in homeownership amongst Americans. And I thought that that was a very important thing in society where property development is a critical issue. You want as many property owners as you possibly can have, and therefore I said subprimes are risky but it's worth the risk in my judgment. It's worth the risk for the value, really, and indeed I hope that in all the revisions that are going to occur as a consequence of what has clearly been a debacle of unbelievable dimensions considering the size and nature of the market, I hope that we don't bury subprime mortgages.

Yeah, lending money to people with bad credit is universally a good idea - but only in a world where money and credit must continue to expand indefinitely into the future or the entire financial system falls in on itself.

On the solutions for the current housing market problems:

That if you just say step back and say what specific action at this point would stabilize the financial system? I would say some alchemy can pick up all of these 300,000 units (unsold homes) and let them disappear, that would stabilize the market. I'm not suggesting that is probable. But what it does is it focuses where the nature of the problem is. Tax cuts are not likely to significantly support home sales. They may at the margin but the real issue at this stage is people are holding back from buying houses, prices are falling so there's more non-income related issues than purchases at home than there is in the general market.

Just what we need - more alchemy to support artificially high asset prices.

On building wealth in America and around the world:

Now, I think the real big surprise to me is the extent to which the mortgage-backed securities backed by subprimes sold outside the United States, remember the original shock was probably bought in ... discovered it had this extraordinary large fundings of subprimes, and what is clear is essentially this big, exorbitant subprime mortgages went from an extraordinarily low level to a huge level because people will be trying to become homeowners and seeing in fact a very significant part of the American population was getting very large wealth ... by just owning a home, and as this catch-up began to push, which would not have been a big problem for anybody if it weren't for the securitization of these products.

He still probably goes to sleep at night not realizing that he, more than any other single person on the planet, is responsible for the current mess.