The Big Shitpile

I like Atrios' term for it, not because of Duncan Black's politics, but because it accurately describes what we're looking at. (Picture from The Fattys.)

The present financial crisis was caused by brokers combining so-called "sub-prime loans" (aka shit) with decent mortgages into securities and derivatives. This pile of capital was then traded like real securities, which worked fine until the shit started to stink, i.e. when the rates on those loans re-adjusted to what they should have been all along. The wave of defaults turned the whole pile of securities into something you couldn't price, because it would take enormous work to figure out which bad mortgages were in what jumbo instrument.

The idea was to make a pile on the shit, but the shit stunk up the whole pile. Thus, shitpile.

It gets worse. A lot of mortgage brokers deliberately inflated the price of homes, flipping them over-and-over until values went completely out of whack to reality. ($805,000 for North Massapequa? )

The brokers did this because they made money each time a house sold, and the pay-out rose as the price rose or the quality of the loan fell.

There was every incentive, in other words, to avoid regulation, there were a host of people involved who weren't regulated, and even those areas subject to regulation had regulators who were either asleep at the switch or actively participating. (Picture from Rising Hegemon.)

But wait, there's more. Much of the big shitpile was sold on international markets. It was bought by foreigners who were told they were getting gilt-edged, sometimes even government-backed securities. Which they weren't. They were getting piles of shit. Piles that are defaulting, losing their value. Leaving investors wondering about the credibility of all U.S. government debt (such as $9 trillion we owe as a people) and the word of any U.S. government (even though it was just one Administration, that Administration represents all of us, like it or not).

This sort of thing happened in the past. In the late 1970s Michiganders piled their property into cars and drove to Houston looking for work. A few years later, during the oil bust, Houstonians reversed the process. But we're talking about something that is going on across the country -- there is nowhere to move.

So what are the Bushies doing? Trying to blame liberals. Liberals like  New York Attorney General, Andrew Cuomo, who is trying to look inside the Big Shitpile. This is pure chutzpah, the thief  blaming the cop for the run on the bank caused by the thief's daring daylight robbery of it. Then there's the finger-pointing. This was the predictable result of greed hitting an unregulated market.

Enron? This makes Enron look like a break-in of a child's piggy bank. This is the biggest financial scandal of all time.

This is precisely what caused the 1929 stock market crash. A completely unregulated market, enormous incentives to bid prices past reality, and a search for greater fools.

But the impact, in this case, may be more like what happened after the 1837 Panic. Don't remember? Didn't read your history? While revisionists still blame Andrew Jackson, what actually happened was that states floated enormous bond issues -- some as big as $1 billion -- to build canals across the Appalachians which could never pay for themselves.

When it became apparent the canal idea wasn't working, the states walked away from the loans. So did the U.S. But the knock-on effect was to make U.S. paper of any kind -- including the U.S. dollar -- worthless in Europe. No one would lend, even good paper was priced at pennies on the dollar, and bankers like George Peabody (right) wandered about London for over a decade, unable to do business. He was saved by the California Gold Rush, which made the U.S. look like a good bet again, but there's no such explosion of wealth in the offing.

The great fear I have is we're about to repeat the 1837 experience, only without the hope of recovery. The current fall of the dollar could easily be a prelude, to be followed by hyper-inflation in this country and an economic collapse. That's not just a blogger talking -- respected economists like Nouriel Roubini (left) are sounding the same kind of alarm.

What I wrote in 2005, about the possibility America might turn into Argentina, is getting frighteningly close to reality. It will take enormous wisdom for us to avoid that now, and I don't see any in Washington.

Or in the financial press.