Thrift is a virtue
Much wisdom is being shared in publications in the wake of the current tumult of global credit crunch, egged on initially by the collapse of the subprime mortgages in the states. Commentators readily traced back history and pointed to the loose monetary policy, that interest rates were set too low for too long, in setting the scene for the liquidity party, which has since been fueling the appetite for more risk-taking, therefore asset prices and returns from basically all financial games of speculation.
Attention is also drawn to the products and process of securitization and globalization of virtually every sort of financial risk, which in theory helps spread risks and, as a matter of fact, helps more people and businesses gain access to credit on better terms. But as financial assets of all sorts, including credit-card and mortgage debts can be turned into securities to be bought and sold, lenders no longer need to keep loans on their books and have no incentives to look carefully into the credibility of the borrowers. In the crisis of meltdown, however, as triggered by a hugh number of loan defaults and shown in the world currently, no one seems to have much of an idea about who in the financial system was caught for which risks, and there seems no stoppage to the domino effect of breakdown that many involved have to write off huge damages.
As with every other problem in any market economy, debates also readily shift to the roles of regulators and the appropriate degree of regulation - in this case, central bankers and the likes, and how much liquidity banks and other lenders in general need to allow for on their books.
The Economist sums it best by suggesting (though not exactly in these words) that there is too much blind faith put in the central bankers to sustain robust economic growth with inflation in check, therefore the liquid environment for more risk-taking and, most moral-hazardously, that they will always come to the rescue with rate cuts in face of any financial crunch. But even the likes of Alan Greenspan and Ben Bernanke are only human and there is no magic wand to maintain both financial and economic stability without igniting the risk of inflation.
Funny enough, all lessons brought up tend only to focus on the lenders - the risk-takers who trade in securities for high returns - and their greed - their appetite and incentive for taking on more risks - or even the liquid environment, but hardly on the core to the problem, at least the current problem of subprime mortgages - the borrowers. That is, many people chose to live far beyond their means for too long in the first place. That cheap credits were made available everywhere was no excuse for reckless borrowing and the failure to make ends meet eventually. Frugality is a virtue after all, but largely and sadly, ignored, for too long.
Attention is also drawn to the products and process of securitization and globalization of virtually every sort of financial risk, which in theory helps spread risks and, as a matter of fact, helps more people and businesses gain access to credit on better terms. But as financial assets of all sorts, including credit-card and mortgage debts can be turned into securities to be bought and sold, lenders no longer need to keep loans on their books and have no incentives to look carefully into the credibility of the borrowers. In the crisis of meltdown, however, as triggered by a hugh number of loan defaults and shown in the world currently, no one seems to have much of an idea about who in the financial system was caught for which risks, and there seems no stoppage to the domino effect of breakdown that many involved have to write off huge damages.
As with every other problem in any market economy, debates also readily shift to the roles of regulators and the appropriate degree of regulation - in this case, central bankers and the likes, and how much liquidity banks and other lenders in general need to allow for on their books.
The Economist sums it best by suggesting (though not exactly in these words) that there is too much blind faith put in the central bankers to sustain robust economic growth with inflation in check, therefore the liquid environment for more risk-taking and, most moral-hazardously, that they will always come to the rescue with rate cuts in face of any financial crunch. But even the likes of Alan Greenspan and Ben Bernanke are only human and there is no magic wand to maintain both financial and economic stability without igniting the risk of inflation.
Funny enough, all lessons brought up tend only to focus on the lenders - the risk-takers who trade in securities for high returns - and their greed - their appetite and incentive for taking on more risks - or even the liquid environment, but hardly on the core to the problem, at least the current problem of subprime mortgages - the borrowers. That is, many people chose to live far beyond their means for too long in the first place. That cheap credits were made available everywhere was no excuse for reckless borrowing and the failure to make ends meet eventually. Frugality is a virtue after all, but largely and sadly, ignored, for too long.
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