Etcetera
Mark Zandi’s book Financial Shock focuses on the role of the housing
crisis in precipitating the current economic crisis. For example, Zandi
includes an excellent discussion of the role of speculators, called
“flippers,” who bought houses on credit for quick turnover (a six-month
sale, hopefully at a profit) and became an important part of the growth
in both the supply of housing and increases in prices. The book also
includes a detailed discussion of how home mortgages were “sliced and
diced,” packaged in very large securities and sold to financial
institutions and investors worldwide. If one wants to understand how
these securities were sliced up, with various “tranches” (different
levels of risk and interest rates) sold to investors, Zandi describes
this in detail.
One theme of this book is that easy credit in all aspects of the
housing market, not just subprime mortgages, led to the housing crisis.
Of course, the conventional wisdom of ever- increasing home values, and
the ease with which people could purchase houses with little or no down
payment or evidence of income, is described in detail.
Zandi asks: What went wrong? “First and foremost, the risks inherent
in mortgage lending became so widely dispersed that no one was forced to
worry about the quality of any single loan,” he writes. “As shaky
mortgages were combined, diluting any problems into a larger pool, the
incentive for responsibility was undermined.”
He notes that the market for mortgage-backed securities became
increasingly esoteric. “Derivatives such as collateralized debt
obligations, or CDOs, were particularly attractive,” Zandi writes. “A
CDO is a bondlike security whose cash flow is derived from other bonds
which, in turn, might be backed by mortgages or other loans.” Here is
something interesting: “At the peak of the boom, such bonds had
accounted for half of all mortgage originations,” Zandi writes.
While reading Financial Shock, we were struck by the fact that, had
we had been paying attention in 2005 and 2006, we could have seen the
housing crisis coming. The few economists and financial reporters who
spoke out or wrote about the bubble in housing were ignored by nearly
everyone—including the two chairmen of the Federal Reserve.
Reviewed by Dean Coddington, senior consultant, and Keith Moore,
chairman and CEO, McManis Consulting, Greenwood Village, Colo., and
members of HFMA’s Colorado Chapter (dcoddington@mcmanisconsulting.com
and kmoore@mcmanisconsulting.com).