Wilberne Persaud, Financial Gleaner Columnist

Between 1986 and 1989 the United States' Federal Savings and Loan Insurance Corporation closed or otherwise disposed of almost 300 institutions with US$125 billion in assets.

The Resolution Trust Corporation created by the US Congress in 1989 disposed of 747 thrifts with total assets of US$394 billion.

Over 1000 institutions and according to varying estimates, a minimum of US$519 billion in assets went on the block.

Regardless of controversy over value, the numbers capture the difference in scale - chicken feed to the potential meltdown that the US central bank, the Federal Reserve, in conjunction with JPMorgan Chase, has now intervened to cauterise.

The problem is unimaginably, indescribably big. Conservative estimates put the US housing market at US$20 trillion, and the residential mortgage market at US$12 trillion.

Hands-off attitude

Much as extreme laissez faire market advocates might wish, it seems impossible to contemplate a hands-off attitude on the part of the Fed.

Unsurprisingly, Wall Street moguls themselves approached the authorities.

Is this system biased towards corporate welfare or what? What of those huge pay packets and bonuses? Will some of this be contributed to assist? Are these questions only for the naive to ask but not to be answered?

Financial innovation

Consider the difference 20 years of financial innovation makes. First, in those good old days of '88, mortgages could be specifically identified and valued because of a second difference between then and today.

Wall Street-initiated securitised holdings straddling the globe from New York to Geneva on to Mumbai, did not yet exist.

Then, the issue was a subset of the financial system and structure; now it is the whole and global.

Today's problem resembles more the lead up to the crash of 1929 than that of the 1980s savings and loan institutions, their borrowers, creditors and collateral.

Banks and financial houses exist on confidence as they negotiate divergent needs, wishes, and fears of those who create wealth and those who hold wealth, people who want to borrow and to save.

Savers want a safe place to store funds. A place from which they can retrieve funds at will.

Borrowers want a place from which to access capital resources at reasonable cost with predictable, preferably guaranteed flow.

This is what the financial system provides.

In the midst of all this locate the profit motive or capitalism, or greed, or whatever you wish.

Reality: this system works. Each participant requires 'a turn' from the wheel, a cut off the proceeds.

Innovation in 'products' tends to increase the returns from a turn at the wheel.

The dilemma is the wheel goes around and around, up and down, with extremes of euphoria and gloom, bull and bear, confidence and its absence.

Reality: 'fundamentals' and the 'real sector' of the economy always provide the canvas upon which confidence gets painted.

But artists sometimes create bubbles in their pictures. With noble goals, perhaps, but also with an eye to profits, lenders created the sub-prime mortgage, a new product that allowed much more participation in home ownership than before.

A big pull was a derivative of this: the ability to bundle and sell these individual contracts in bits and pieces to investors relying on experts and rating agencies to make their decisions on when and what to purchase.

This was an entirely self-policed arrangement.

Government regulation was absent.

Some blame Alan Greenspan for this. Today his guru stock seems to be falling as commentators dare to suggest his hands-off or enabling approach and support for no regulation must take some of the blame.

Housing market

Some analysts predict the housing market must fall another 20 per cent before sales pick up in any sustainable way.

In pure financial numbers we're talking about a figure of the order of US$4 trillion in value. Compare this to US GDP in the region of US$15 trillion.

The implications for housing starts, condo sales and values, construction sector jobs and all the way backwards or upstream for the economy, and for 'consumer confidence' are staggering.

It is this that the Fed and US Treasury Secretary Henry Paulson contemplate.

You can't push on a rope, at least not too hard. Is Keynes 'liquidity trap' upon us?

Fed funds may be created, let loose in the economy but will the investor exhibit the 'animal spirits' required to up-shuffle the US and, therefore, global economy?

Are climate change, a credit-card funded war in Iraq, price of oil, falling dollar value, Beijing Olympics and Tibetan struggle for self determination, environmental decay with inexplicable die-off of bats and bees, plastics killing the albatross in the Central Pacific, and more, permeating the spirit of the consumer, providing a less upbeat feel?

Twenty years of financial innovation might have been matched and indeed overtaken by 20 years of technology and the internet, evolution in the human grasp of global affairs and the impacts our very existence delivers.

And what does high finance and economics have to offer for these aliments? Is the choice always economic production versus quality of life? I daresay not. But who determines, who is it that creates, perception of the good life?

wilbe65@yahoo.com