Money blindness

The present financial crisis started with private real estate and is now continuing with "national" real estates. Common behind these crises has been the fact that far too much mispriced credit was extended to private and national entities. When you advance mispriced credit to people with no incomes and no collateral, or in the case of countries to governments pursuing policies that prevent creating sufficient taxable income to pay them back - you get repeatedly into situations we face today.

Recall, back in 1974, many real-estate investment trusts lost as much as 90% of their value in less than a year, being highly leveraged and too dependent on commercial paper just when interest rates started rising fast. Later, in the 1980s, Western banks were sitting on an estimated one trillion dollars of losses on loans advanced to so-called Third World countries - at a time when a trillion was a trillion...

Reuven Brenner holds the Repap Chair at McGill's Desautels School of Management. the article draws on his Force of Finance, A World of Chance and on "The Keynes Conundrum" (with David Goldman, in First Things).

Read full article: Asia Times Online, July 23, 2011