2012, the fourth year of failed monetary policies

What do politicians of the so-called new and old worlds wait for applying Keynes principles instead of these last years of failing loose monetary policy? The causes of the latest financial crisis have been analysed, described, interpreted so thoroughly that even my retired mum and dad finally understood them. Getting to know what, how and where from should be deemed sufficient to clean up this mess. Well it was not apparently or if it was, no one had the courage to do it. But let's go back to the origins:

Like previous ones, this crisis has its roots in the cheap money readily available from the Fed, in other words loose monetary policy. Cash was flowing with little if any control. The laziest way a society may use this cash is to finance construction of low cost accommodations, simply because it rapidly absorbs unemployment by providing easy-to-fill jobs, or low skills ones if you prefer. The dark side is this building activity does not create value for the economy. Innovation is nil, workers won't gain any useful skills... Meanwhile these new accommodations need owners. Cash is cheap so let's give it to those who need it to buy these cheap houses or flats. And since cash flows faster than accommodations can be built, their price soars and lenders feel safer with the value of their mortgages going up.

Should the process stall, lenders will compete for buyers by offering even cheaper loans, at least for the two or three first years, after all loans rates are variable. Or worse, let's provide buyers with more cash than they need. Anyway real estate prices continue to increase with the mortgage or the insurer covering the difference. Lenders never felt so confident about their risk profile.

Until of course prices growth stops. They will eventually fall, first because there won't be enough buyers to acquire what is continuously built, then because of the increasing foreclosures. Here is the catch 22. Because inflation went up with real estate prices and construction wages from historically low unemployment among others, the Fed intervened to refrain it by increasing the cost of cash, which in turn weighed on households budget and in particular those relatively recent home buyers who just happened to enter in the third or fourth year of their loan with higher instalments to pay (remember the promotional first 2 to 3 years?). Some borrowers start to accumulate overdue loan instalments, foreclosures increase, and we know the following...

Too easy? Of course! Many financiers, brokers, resellers, bankers, consultants and any other kind of intermediaries did bring their own layer of complexity in the process to profit in a way or another from this bonanza. The outturn is nonetheless not more complicated than what this simplistic analysis describes.

What did make this very crisis more painful is a lot more financiers did participate in the game, and with a lot more creativity than before. Call it the investment banks effect. Commercial banks only were supposed to take commercial real estate risks. Well...