‘Scapegoating’ the Markets?

It’s finger pointing time again! In every crisis there’s got to be a scapegoat, and with the ongoing tremors felt in the global financial markets, the easiest blame always falls to where the stress is evident—the markets.

First, financial markets become the OBJECT OF SCORN for transmitting adversarial conditions to the real economy or to our ‘hapless’ neighborhood folks. Second, markets are DOWNPLAYED FOR THEIR CONTRIBUTIONS to the economy and worst of all, markets are even portrayed as AN ECONOMIC WEDGE to the society’s income class structure!

But do markets really deserve such blame or are these symptoms to other UNSEEN factors glossed over by such commentaries?

The investing public talk today about the US subprime blowout as is if it was a staple; your every morning oatmeal or ‘pandesal’ and coffee on your breakfast table. The notion is that the subprime woes CAUSES today’s market jitters.

In contrast, for us, the subprime imbroglio is only a strain to a deeper structural malaise bluntly dismissed by the mainstream.

Subprime loans are simply loans to people who are less financially qualified or have spotty credit histories. In the US, these imploding subprime papers represent the popping bubble in its housing industry that preceded it. Such instruments were mostly used in the acquisition of assets by the public in the belief that:

1.) monetary conditions would perpetually remain favorable or interest rates would remain always low or

2.) housing prices would continually rise which encouraged speculative “flipping” purchases, which became a vicious cycle even by those who can ill afford to make those regular mortgage payments or

3.) access to these loans to refinance or extract from existing equity to fund lavish lifestyles are immune from economic cycles

In sum, subprime loans were acquired NOT for productive purposes, but either for plain consumption or outright speculation.

Moreover, originators and other lending intermediaries took advantage of the sizzling hot love affair with the Housing boom and engaged the public’s appetite with more adventurous risk taking behavior through a reduction of lending standards.

Nonetheless, this expansive lust for risky assets essentially spread from lenders to investment banks and prime dealers, which packaged and repackaged such securities into highly complex levered forms of instruments, had them stamped with approval by established credit rating agencies and sold to financial institutions (hedge funds, insurances, pension funds, corporate treasuries etc…) around the world, who were then hungry for profits or to those who were eager to match returns with existing liabilities, in a world where rates of returns have diminished.

In short, in boom times risk was conventionally thought to have been “EXTINCT”.