Monday, May 26, 2008

The Giant Pool of Money

This American Life in collaboration with NPR News had a fantastic episode titled The Giant Pool of Money investigating the causes of the housing bubble. I highly recommend it.

This is a great introduction for those who ever wanted to learn about Mortgage Backed Securities (MBS) and Collateralized Debt Obligations (CDO). It includes numerous interviews with the key players including subprime mortgage borrowers, Wall Street Bankers, and mortgage brokers.

Although I was glad to see they squarely listed the root cause of the housing bubble as the loose monetary policy of the Federal Reserve under Alan Greenspan, I wish they had talked more about other government policies that contributed to the housing bubble. For example, the government sponsored mortgage buyers (Fannie Mae, Freddie Mac, the FHA), housing subsidies such as tax breaks on mortgage interest ("ownership society"), and the SEC-sponsored ratings cartel (S&P, Moody's, and Fitch). And most importantly, moral hazard -- that is, the promise of future government bailouts caused by past government bailouts. We've already seen some of this with the Bear Stearns bailout and the numerous lending facilities created by the Federal Reserve.

Many analysts keep calling for the bottom of the credit crisis. I'm not sure we're even half way through it.

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