“Behold, the liquid Thames is frozen o’er… ”
Yesterday, we spoke of re-arranging chronology to suit us better. Today, it is geography we’d like to improve upon.
We begin with the weather report. Even though we are on the threshold of spring – with bushes and trees already in bloom all over London – it is freezing cold. The Thames is not really frozen over this morning, but there is ice on the puddles along the Southwark walk.
If only London could be dragged to the south! It is often cold, windy, rainy, gray and overcast here. Why couldn’t all of England be dropped down… say to the latitudes of Spain… or even Morocco?
It is clearly not possible to re-arrange the map, but is it possible for climate change to affect a place? Apparently, yes. At least, that is the theory of global warming. According to the theory, mankind has changed the whole world’s climate. It seems unlikely to us, but what do we know?
And the Soviets thought they could, at least, change the climate of certain regions. Among their crackpot projects was one in which they were to grow peaches in Siberia. Anything was possible for the New Marxist Man, they said to themselves. They spent millions of dollars – and wasted thousands of lives in slave labor gangs – trying to realize this project. None of it worked.
The climate change projects that actually did work were accidental and, from most points of view, disastrous. Large parts of the ancient world – from Athens to Baghdad – were once covered in forest, with streams and springs – and many wild animals, including lions.
Gradually, the trees were cut down. Crops were planted. Goats, cattle and sheep were allowed to over-graze. The soil washed away. Without the trees to protect the ground from the sun, the entire eco-system dried up… the surface water evaporated… the animals disappeared… the seeds and berries blew away… and what remains is the area as we know it today – much of it dry, barren, denuded.
Apparently, much the same thing happened in the Andes Mountains. The story is less well known, and much of it is just conjecture, but some scientists think the Andes were also covered in forest until fairly recently. Then, the pre-Columbus Indians cut down trees… and introduced agriculture.
Later, the post-Columbus settlers increased demand for forest products – for building and for fuel. But it was too late. There were already goats, llamas, cattle and sheep on the land. And once the four-legged animals are on the ground in force, there is no chance that the forest can re-establish itself, because the young seedlings are eaten before they can mature… and then the seeds themselves disappear.
As far as we know, only on the East Coast of the United States have forests ever come back. There, livestock is generally restricted to fenced-off pastures. There is also more rainfall. So once land was no longer actively farmed, the trees came back.
What has this got to do with money? Maybe nothing. But economies are not so different from ecosystems. Besides, not much happened in the world of money yesterday, so we’ve got to use our imagination.
However, the euro did creep above $1.33… and gold rose to $659.
Stocks rose again, too. And subprime lending is really no problem at all; everyone says so.
What is happening, though, is that the noose around the average consumer’s neck must be getting tighter.
“Banks are… restricting access to credit months after Chairman Ben S. Bernanke stopped raising interest rates,” says Bloomberg.
“Countrywide Financial Corp., the biggest U.S. mortgage provider, last week stopped taking applications for no-money-down loans from risky borrowers without proof of income.
“General Electric Co.’s WMC Mortgage, the fifth-biggest U.S. subprime lender, said March 9 that it would refuse mortgages to borrowers with credit scores below 600. The Burbank, California-based bank also fired 20 percent of its staff.
“Three days later, Calabasas, California-based Countrywide limited subprime borrowers that don’t document their income to loans worth 85 percent of their homes. Wells Fargo & Co., the largest U.S. subprime lender, said in a March 7 statement to Bloomberg News that it changed standards effective Feb. 16 for some risky customers.”
Lenders are getting tighter. No longer is a man’s word good, not in mortgage lending. The mortgage providers want to see tax returns, pay slips, bank records. What this means is that the lowest rung of the housing ladder is being torn off. Down at the bottom, the weakest buyers have nowhere to put their feet. But if they can’t buy… to whom do the subprime builders sell their houses? And what about the marginally prime on the next rung up? Who will buy their houses… so they can move up… and eventually buy a McMansion?
It may be true, as we reported yesterday, that only 15% of subprime loans are in trouble… and that subprime represents only 10% of the mortgage industry. But everything happens at the margin. In a neighborhood of 100 similar houses, each one worth $200,000, if one of them is sold for $150,000 – the value of the entire neighborhood is suddenly marked down. The total implied loss in wealth is $5 million – even though only a single house was sold, and only at a $50,000 discount.
When the most marginal buyers can’t get credit, the not-so-marginal sellers can’t make a sale. If they can’t sell at anticipated prices, the value of their collateral is called into question, so they can’t borrow either. Then, the whole structure of credit begins to dry up.
Someday, and you can quote us on this, the lush, green forests of today’s credit expansion are going to go brown.
Markets and Money