by Triple Witching

Created on: September 16, 2009   Last Updated: September 21, 2009

Who wrapped up the wet hay?

As hay is reaped from the field and wrapped up by all the workers, every worker has a responsibility to make sure that every strand of hay is dry and free of moisture prior to being baled, for once that hay bale is wrapped up and left in the sun, any moisture whatsoever sets off a reaction of friction so intense which can cause spontaneous combustion.

Whilst we as consumers and taxpayers are looking for something and someone to blame, let's not forget our own efforts in this whole affair. There are several links to this chain of financial strangulation and although the links vary in size and therefore should bear different levels of burden and responsibility, every link in the chain contributed (to some degree) to this disaster.

The excuses have been wide and varied if you surf the internet looking for answers as to why the markets have been in such turmoil over the past 2 weeks in particular. Some articles have even blamed Alan Greenspan and the central banks globally for setting up such a low interest rate environment which not only allowed people to become so indebted but also put such upward price pressure on the housing market with an influx of demand. Yet these attractive levels of interest and inflation rates, coupled with relatively low unemployment and record share price levels amongst the developed economies were celebrated by many investors prior to 'combustion', 18 months ago! Let's remember - the central banks weren't the parties bundling up the wet hay. The role of a central bank in an economy is to maintain the liquidity of the funds flowing through an economy at a level which provides for price stability. It does this through the setting of official cash rates. That is exactly what the central banks have been doing.

To blame the housing market boom and then bust is just a superficial analysis as the economic wounds were not created on the surface and housing prices don't rise and fall on their own. Real estate prices behave just like any other financial market and do change for both the better and the worse as a result of changes in an economy due to the forces of supply and demand. The human element triggers of these forces, however, may be questionable and are discussed further below, but at the end of the day, the cyclical nature of the housing market is not the cause of this crisis.

A large amount of responsibility lies with those who wrote the loans and those who bundled the loans

The large corporations and regulators,

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