House of Cards
17th August 2019
ZMan talks about money.
One way of looking at the mortgage crisis is as a form of currency devaluation. The global financial system is based in credit. That’s the base unit of value. Government debt and to a slightly lesser degree, corporate debt, is the foundation of the global financial system. Government issues debt, which increases the supply of money in the system, as that debt is used as collateral in the system. Central banks can buy and sell debt to control the supply of money in the system.
What no one thought much about, it seems, is how players in the system could devalue credit, in the same way governments devalued currency. That’s exactly what the mortgage brokers were doing. By lowering credit standards for borrowing, they were debasing a fundamental unit of currency in the system. This went unnoticed for a long time until everyone started noticing at the same time. The panic to unload the debased currency – those bad mortgages – set off the mortgage crisis of 2008.