In the February Harper’s is an absolutely mesmerizing piece by a financial trader on the nature of bubbles. Because it’s mostly behind a paywall, there’s little pointing in linking here at this time, but I would like to copy and highlight one crucial passage, in which the author Eric Janszen talks about "debt pollution."
Another environmental metaphor has been extended into another realm of finance, following in the footsteps of "sustainability," which (as discussed a few months ago) has been devalued almost to the point of uselessness. But this one — "debt pollution," or "risk pollution" — still packs quite a punch. Here’s Janszen:
The U.S. mortgage crisis has been labeled a “subprime mortgage
crisis,” but subprime mortgages were only a sideshow that appeared
late, as the housing-bubble credit machine ran out of creditworthy
borrowers. The main event was the hyperinflation of home prices. Risks
are embedded in price and lurk as defaults. Even after the faith that
supported a bubble recedes, false beliefs continue to obscure cause and
effect as the crisis unfolds.
the chemical industry of forty years ago, back when such pollutants as
PCBs were dumped into the air and water with little or no regulation.
For years, the mantra of the industry was “the solution to pollution is
dilution.” Mixing toxins with vast quantities of air and water was
supposed to neutralize them. Many decades later, with our plagues of
hermaphrodite frogs, poisoned ground water, and mysterious cancers, the
mistake in that logic is plain. Modern bankers, however, have carried
this mistake into the world of finance. As more and more loans with a
high risk of default were made from the late 1990s to the summer of
2007, the shared level of credit risk increased throughout the global
of that enormous risk as ecomonic poison. In theory, those risk
pollutants have been diluted in the oceanic vastness of the world’s
debt markets; thanks to the magic of securitization, they are made
nontoxic and so pose no systemic risk. In reality, credit pollutants
pose the same kind of threat to our economy as chemical toxins do to
our environment. Like their chemical counterparts, they tend to
concentrate in the weakest and most vulnerable parts of the financial
system, and that’s where the toxic effects show up first: the subprime
mortgage market collapse is essentially the Love Canal of our ongoing
Janszen also offers a precise amount the real estate market will fall: 38%. Wow.