Yesterday seemed so much like the day before the last day of the world. The numbers of bad subprime loans are eye boggling. One would think that every loan written the last five years was subprime. Then this morning I read of the latest economic forecast from UCLA, and their prediction is still for 1.5% growth in GDP, they'd be surprised if a recesssion develops. Surprised! I thought there was a nearly unanimous recognition that we were already in a recession. For the bold, this may be one of those once in a decade opportunities to snap up stocks cheaply when pessimism is widespread. Of course, I can't guarantee that the pessimists may prove right, we could see lower stock prices, maybe all of our financial institutions are failing.
It seems to me that we are getting a perfect financial storm. I worked in the commercial banking and residential mortgage markets more than 25 years ago, and marvel at the differences, and suspect that those differences have led, in part, to our current situation.
Commercial banks, insurance companies, and investment brokerages, were distinctly separate industries, and could not be combined. Derivatives weren't common. Most credit applications were reviewed and approved by humans locally, now computers make most of the decisions. Regulators have increasingly reduced the regulation of financial institutions and relied upon internal regulation within the industries themselves. All of these changes worked well as long as the economy operated normally. But in the days of the housing bubble, all of these things began to break down. Financial institutions were chasing fees and high yields, fell vulnerable to fraudulent credit applications, didn't understand the nature of risks in securitized mortgages, etc.
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