Systematic risk..................

"The fundamental and ancient relationships that underlie credit, going back to passages in Deuteronomy - that borrower and lender enter a relationship that carries obligations on both ends - were severed by firms originating mortgages, taking the front-end profit, and selling the mortgages off into investment pools, defined mostly by their yield, that were then sold far and wide by the great marketing and influencing machines of Wall Street.  Prudence, even common sense, had been bled out of the equation."
-Ron Suskind, Confidence Men: Wall Street, Washington,
and the Education of a President

We claim no original insights into the popping of the housing bubble and the great financial meltdown post 2006.  But, let me relate a vivid memory:

When I first borrowed money to invest in real estate,  the year was 1979 and the place was Park National Bank.  I was a youngster with no visible financial wherewithal and could only borrow because my broker - and mentor - was willing to co-sign the note with me.  While sitting and waiting to talk to the bank's main commercial lender, I got to watch and listen to him work.  He was on the phone, in a no-nonsense kind of way, working his not-very-long list of customers who had missed a loan payment.  It was very clear to me that he took the business of lending, and re-paying, seriously and that there were consequences for both the lender and the lendee when things did not go as planned.

By 2004, it was becoming pretty obvious that the financial industry (except for Park National Bank) had changed dramatically.  Distracted by other things, we did not quite connect the dots in a useful way, but the biggest change to us seemed to be this gaping disconnect between those in charge of lending the money and those in charge of collecting the re-payment of money.  Lenders (many, not all) were being compensated for shoveling money out the door, with no negative consequences if that money was not repaid.  Standards got tossed out the window.  A far cry from 1979.

The writer of Deuteronomy would have been appalled.  Our economy has been reaping the consequences for the past four years.

For a previous post about Park National Bank go here.