Bubble Bathing, or Historical Déjà vu All Over Again

I've been reading Popular Delusions and the Madness of Crowds on my Kindle, and just finished the British version of the market follies: the South Sea Bubble. Reading the book in the US as the sub-prime mortgage disaster unfolds rings a lot of bells. For one thing I note how, though the British government responded to the crisis, it did so through using the Bank of England. In America we have somehow developed the concept of the Federal Government as bank, which is, of course, completely unhealthy. Of more concern, though is the blame game. As always, the largest target gets the most arrows. The banks and other institutions who offered these bad loans are now under heavy fire. There are calls to 'save the poor home owners'. It makes me think of the plaintive cry that arises whenever there is a public panic in The Simpsons: 'Isn't someone going to think of the children?!'

Well these aren't children, they're adults who entered into a contract knowing full well that they couldn't afford it. No one seems to have pointed out or determined just how many of these folks who took out sub-prime loans were actually floating several home purchases as part of one of the real estate schemes (scams) that (until recently) were so widely advertised on infomercials as a sure road to riches. I'm sure many of these future millionaires got caught at a very inconvenient moment, trying to flip an expensive property just at that point the whole inflated market came to earth.

It seems that the help to be offered to the 'victims' of the sub-prime crisis is to be very limited, at least if the Administration's plan wins out. Perhaps as few as 5% of the effected loans will get active relief from the Feds. But a much larger proportion of the loans will be modified by government intervention, leaving the loan companies with an unprofitable instrument. It's good that the emotionally driven 'what about the children!?' relief called for by the Social Democrats is not winning out so far, but as always, I suspect that when all is said and done the results will be same as in every other bubble: Those who were both clever and immoral will flee the scene with their money. Those who were stupid will be bailed out, at least in part. Those that had no idea they were at risk, i.e. the entire tax-paying constituency of the US, will end up stuck with a huge bill and possibly a recession to boot.

Like the man said, Déjà vu all over again.