Ponzi lives!

Buencamino writes political commentary for Action for Economic Reforms. This article was published in Business Mirror January 30,2008 edition, p. A10.

The US Federal Reserve announced a three- quarters of a percentage point rate cut on its benchmark-interest rate.

An asset manager from a Philippine bank echoed the ecstatic reaction of the global financial markets:
“This will slow down the bear. This Fed action sends the signal that it will do all it can to help financial markets and avoid a recession. It is a good signal for markets considering an imminent US recession. The rate cut will encourage lending, lift economic activity and encourage funds to seek higher yields,” she said.

The banker’s remark reminded me that I first heard about an impending global financial crisis a year ago, during a disastrous round of golf with an American friend who used to work with one of the financial institutions hardest hit by the sub-prime catastrophe.

I was surprised he brought up the topic because, at that time, sub-prime lending wasn’t coupled with the word “crisis” yet. Besides, our conversations usually revolved around our hopeless golf game and the joys of his retirement, taken years before he needed Viagra to savor the benefits of having a lot of money and a lot of idle time.

“The whole thing is about to collapse,” he said.

“What is?” I asked.

“The pyramid of leveraged toxic paper,” he replied.

I gave him the look a golfer facing a par-saving six-foot side hill putt on a super fast green would have.

“Any Joe Schmo who passes the mirror test can get a property loan,” he said.

“Huh?” I reacted.

“The loan officer holds a mirror to your face and if it mists up, it means you’re still breathing. Sign of life, that’s all you need to get a housing loan these days,” he explained by way of exaggeration.

“No shit,” I laughed.

“Yeah, cheap and easy money fuels the real estate boom,” he replied.

“So easing loan requirements is smart,” I said.

“Except interest rates do not stay low forever and property prices do not appreciate forever,” he said.

“Unfortunately,” he added, “creditors don’t care because the financial giants are buying their mortgage papers.”

“Why?” I asked.

“Because they can repackage and re-sell them as high-grade high–yield investments,” he said.

“But,” he continued, “the inevitable will happen, interest rates will go up, Joe Schmo will be caught in a bind, the market will dry up, property developers will get stuck with inventories, and, as night follows day, loan defaults will come.”

“So what? Those loans are backed by real estate. That’s solid collateral,” I countered.

“Yes, if they can be sold at their marked value. But they can’t so everyone in the financial food chain is left with nothing but defaulted over-valued, over-leveraged papers,” he replied.

“But,” I said, “Bush, Congress, and the Fed will fix the problem, won’t they?”

“They will do whatever it takes to encourage more lending and borrowing,” he replied.

“Will that set things right?” I asked.

“No, it’s not a fix, it’s only intended to keep the game going,” he smiled a pregnant smile.

“I don’t understand,” I confessed. “Why don’t they do something like adopting stricter rules or penalizing foul play so these things don’t happen?”

“Because Ponzi is the name of the game and the players, the rules-makers, and the referees are all on the same team,” he replied.

Before I could ask the begged question, someone from the four-ball behind us barked, “Hit your goddam putt and get off the green!”

I hit the slippery putt and holed it.

“Par! Hole carried!” my caddy cheered.

“Ponzi lives!” my golf buddy sneered.

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