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	A Financial Meltdown in the Making   (September 8, 2005) Here is a Tale of Two Charts. The first one reveals how deeply banks have jumped into the over-extended and increasingly risky home mortgage market, while the second chart shows rather vividly how bank reserves against bad debt--i.e., defaulted mortgages and the like--have sunk to 19-year lows. In other words, right when they're assuming huge piles of risk, they're also cutting their bulwarks against risk to the bone. If this isn't the definition of pure folly, then what else do you call it? Fiscal prudence? If you set out to create a financial crisis, you couldn't do better than this: right at the top of an unprecedented financial bubble (scroll down to the Sept. 3 post, and also check the three "Housing Bubble" essays in the sidebar on the left) in housing, then concentrate your assets to an unparalleled degree in the very asset class which is riding at the top of the bubble. Buying mortgages today is the equivalent of buying the Internet stocks in February, 2000, when the Nasdaq was days away from its high of 5300. (It's 2100 today.) Then reduce your reserves against any potential losses to the absolute lowest level in a generation. The recipe for an unfolding crisis is complete; now lower to simmer and hope for some external shock--say, an era of rising energy costs--which will push heretofore boundlessly optimistic consumer confidence over the inflection point to doubt. Once housing prices stop rising--and that moment seems to have arrived--then an era of defaults and losses begins which will erode away all that risky debt lenders have been falling over themselves to create. Ah, but I forgot--this time it's different. * * * copyright © 2005 Charles Hugh Smith. All rights reserved in all media. I would be honored if you linked this wEssay to your site, or printed a copy for your own use. * * *
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