Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

“Life, liberty, and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place.”     Frederick Bastiat

August 18, 2007

The First Victim Of The Credit Crunch

by Doug Mataconis

The near-collapse of the secondary and sub-prime mortgage markets claimed it’s first victim yesterday:

TUCSON, Ariz. — First Magnus Financial Corp., a national mortgage lender that is suspending operations, says it has laid off 99 percent of its nearly 6,000 employees nationwide and closed all of its more than 300 offices.

According to a notice filed with the state Friday, the Tucson-based company that originated home loans and then sold bundled loans into the secondary loan market expects to retain only about 60 of its employees.

First Magnus officials said a bankruptcy filing was possible.

On Thursday, First Magnus announced that it had stopped originating new loans and was suspending operations.

Company officials said the lender was caught in the credit liquidity crunch now causing a meltdown in the mortgage industry, even though First Mangus was not engaged in selling “sub-prime” mortgages that sparked the crisis in recent months.

This follows Thursday’s announcement by Countrywide Financial that it had tapped into a $ 11.5 billion line of credit to deal with liquidity problems brought on by the problems in the mortgage industry, and is clearly one of the reasons that the Federal Reserve Board decided yesterday to lower the discount rate by .5%.

Yesterday’s action by the Fed did turn the stock markets around, and it’s likely to help most of the mainstream banking industry deal with the short-term liquidity crisis that’s developed in the past several weeks, but the collapse of First Magnus and Countrywide’s liquidity problems should be a signal that we are far from the end of this particular story.

But here’s the thing to remember. What we’re seeing is not a “market failure” and it’s not a sign of some inherent defect in the banking system, it’s the “effect” part of a cause-and-effect scenario that started with the downturn in the housing market. For years, mortgage lenders were foolishly giving money to people who, foolishly, thought that interest rates we hadn’t seen since the 1960′s would be here forever and that they could afford to buy really expensive houses. When that proved not to be the case, people started defaulting on their mortgages and the lenders who gave them money started experiencing liquidity problems.

If anything else, this entire episode should remind everyone that the free market doesn’t prevent people from making foolish decisions, it just ensures that, in the end, there will be consequences paid.

In other words, There Ain’t No Such Thing As A Free Lunch.

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1 Comment

  1. Ahhh, ain’t it the truth, but some angry folks are bound to blame it on the evil corporations. Because its those evil unscrupulous mortgage origination corporations that caused this entire disaster. It was those evil corporations that cause so many people to be so very foolish simultaneously. And they must be punished and regulated!

    Doug,

    However, I cannot consider those economic decisions that people made entirely foolish. If they were all being so very stupid, it would be a market failure. Instead if you accept the short-term bias (What happens in the near-past will continue to happen in the future.), those decisions were entirely rational. In fact some people made huge sums of money because they accepted short term bias. It was such a huge opportunity that people began to quit their jobs in order to speculate and flip houses.

    The key question is, “What entities threw the economic system into the imbalance that created the initial opportunities, and what entities maintained the imbalance that drove everyone in the country engaged in unsustainable and collectively idiotic behavior?”

    Comment by TanGeng — August 18, 2007 @ 11:31 am

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