How Credit Got So Easy And Why It's Tightening

As Oliver Hardy used to say  . . .

"Well, here's another nice mess you've gotten me into."

Yesterday the RealEstateJournal.com posted a great article on The origins of the credit boom and its unfolding predate mistakes in the last year.

The article traces the issues to changes in the banking system provoked by the 1980s savings-and-loan collapse, the Asian financial crisis in the 1990s and the tech-stock bust of 2000-01.

Summary:

Recent events show that financial innovations meant to distribute risk can end up multiplying it instead, in ways neither regulators nor investors fully understand. Mr. Grantham, the Boston money manager, says his portfolios are behaving in ways he hadn't expected.

Fed officials believe that even if their policies led to housing and debt bubbles, the strength of the overall economy shows that the policy was, on balance, the right one. Of course, that assumes the current problems don't culminate in a recession.

Market veterans predict the most egregious underwriting practices and products will disappear, but the benefits of innovation will continue.

Lessons have been learned -- the hard way. "The structures are here to stay," says Glenn Reynolds, chief executive of research firm CreditSights. "But you have to run it like a prudent risk-taking venture, not like it's casino night and you're on a bender."

Click here for the complete article

Author: Brian J. Davis, RAA - Brian Davis & Associates - Brian has over 23 years of appraisal experience in Central, IL and hosts the Appraisal Scoop blog and the WinTOTAL Users Group an email forum for appraisers.