FINANCIAL SHOCK

FINANCIAL SHOCK

Mark Zandi


AMERICAS financial system has long been the envy of the world. It is incredibly efficient at investing the nations savings so efficient, in fact, that although our savings are meagre by world standards , they bring returns greater than those nations that save many times more. So it wasnt surprising when Wall Street engineers devised a new and ingenious way for global money managers to finance ordinary Americans buying homes: bundle the mortgages and sell them as securities . Henceforth, when the average family in Anytown , USA wrote a monthly mortgage check, the cash would become part of a money machine as sophisticated as anything ever designed in any of the worlds financial capitals . But the machine didnt work as so carefully planned.
First it spun out of control then it broke, its financial nuts and bolts seizing up while springs and wires flew out, spreading damage in all directions . 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.... At every point in the financial system, there was a belief that someone someone else would catch mistakes and preserve the integrity of the process. The mortgage lender counted on the Wall Street investment banker who counted on the regulator or the ratings analyst, who had assumed global investors were doing their own due diligence. As the process went badly awry, everybody assumed someone else was in control. No one was.