Wall Street Bank Run

[Purveyor]

By David Ignatius

WASHINGTON -- It doesn't look like an old-fashioned bank run because it involves the biggest financial institutions trading paper assets so complicated that even top executives don't fully understand the transactions. But that's what it is -- a spreading fear among financial institutions that their brethren can't be trusted to honor their obligations.

Frightened financiers are pulling back from credit markets -- going on strike, if you will -- to escape the unraveling daisy chain of securitized assets and promissory notes that binds the global financial system. As each financier tries to protect against the next one's mistakes, the whole system begins to sag. That's what we're seeing now, as credit-market troubles spread from bundles of subprime residential mortgages to bundles of other kinds of debt -- from student loans to retailers' receivables to municipal bonds.

Investors are nervous because they aren't sure how to value these bundles of securitized assets. So buyers stay away, prices fall further and the damage spreads.

The public, fortunately, doesn't understand how bad the situation is. If it did, we might have a real mess on our hands. And there would be more pressure for bad policies -- ones that try to freeze the damage, rather than letting prices fall to levels where buyers will return and the markets will clear. Hillary Clinton's proposed moratorium on home foreclosures, in that respect, is one of the truly bad ideas of our time. It would make the situation worse by increasing even more the illiquidity and inflexibility of the housing market.

The answer to Wall Street's bank run may be a version of what saved Main Street banks during the Great Depression. President Franklin Roosevelt created the Federal Deposit Insurance Corporation in 1933 to reassure the public that there was an insurer of last resort for the banks -- and that people's money was safe even if they couldn't see it or touch it or put it under a mattress. Rep. Barney Frank and other congressional experts are now weighing different approaches to this problem of how to backstop the markets, without Clinton's misguided moratorium.

---EOE---

http://www.realclearpolitics.com/articles/2008/02/americas_mortgaged_future.html

[ayeshahaqqiqa]

1. And some Americans have no clue what is going on

Got a call from a customer about getting an annual termite inspection today. She said she had been putting it off because she'd put her house on the market and thought it would sell right away. She didn't understand why it hadn't. I mentioned the mortgage crisis, and it was the first she'd heard of it.

[thepurpose]

2. You are joking. You have to have made that story up. How can people be so unaware of what's going

on around them? Oh wait, I forgot this is the country that elected an idiot...Twice.

[ayeshahaqqiqa]

4. And I'm living in the reddest part of Arkansas

where I've heard people tell me that Bush is the Second Coming.

[XOKCowboy]

3. My brother's story...

He's a home builder. Small time in a small town that WAS enjoying a growth spurt. He got started 3 yrs ago. His first year he built and sold 3 houses (3br/2ba/3cg type homes in the $200K range). Last year 7 homes built and sold as fast as he could get the crews and lumber. This March he completed his nicest home ever. He still hasn't sold it. He's had plenty of interest but people can't get any money now. Those with financing have thousands of options. So he keeps paying interest on his loan and doing his best not to take a loss on it.

He's not the only one in this boat. The electricians, plumbers, framers, carpenters, etc he used to hire not to mention the lumber yards and mills are now hurting also.

It's not a good thing for anybody.