Creative Financing is So Necessary

I find rationalizations of the subprime mortgage debacle fairly amusing. Certainly Alex Tabarrok's rant about "credit snobs" is a masterpiece of this genre. I didn't see David Brooks's Friday contribution until today, but it's worth reviewing. He likes to explain the subprime crisis in terms of an "Ecology Narrative".

The Ecology Narrative is different. It starts with the premise that investors and borrowers cooperate and compete in a complex ecosystem. Everyone seeks wealth while minimizing risk. As Jim Manzi, a software entrepreneur who specializes in applied artificial intelligence, has noted, the chief tension in this ecosystem is between innovation and uncertainty. We could live in a safer world, but we’d have to forswear creativity.

You've gotta love the irony there (he's gotta be pulling our leg, right?) - the failed loans, billions of write-offs, mass foreclosures, are all from "investors and borrowers...minimizing risk." Brilliant. He doesn't stop there.

Most of the time, the complex new instruments diversify risk and serve the public good. But life requires trade-offs, and, as we’re being reminded this week, the innovation process involves a painful adolescence...They [i.e., the wise people observing all this, like Brooks] don’t like the periodic crises, but don’t see how government can prevent them without clamping down on innovation.

Innovation - yes indeed, all that innovation revolutionizing our lives. No wonder years ago there was so little to show for all that stodgy, boring, run-of-the-mill financing, other than trans-continental railroads, fleets of ocean liners plowing the seven seas, the electification of an entire continent, air travel, automobiles, telecommunications, the green revolution.

Has it occurred to these people what a sorry state of affairs it is when we have all this surplus money floating around looking for an investment and the best they can find are low-grade mortgages on the least desirable properties with the least attractive credit risks? What innovation? What wonderful things are revolutionizing our lives as a result of this creative financing? Cell phones and video games (which are not even manufactured in the U.S.) Maybe the only innovations are in the financial markets themselves.