STDs, Nasty Foundations, and Human Behavior

Richard Fisher, president of the Federal Reserve Bank of Dallas, recently explained that the U.S. credit markets have "contracted a hideous STD -- a securitization transmitted disease." The comments, picked up in a Wall Street Journal posting, related to Fisher's argument against using interest-rate cuts to help alleviate the crisis.

I like the STD parallel, although I've been describing the problem to friends and family members in construction terms. It's as if the cement used to build a city was tainted with impurities that will decay in a few months' time. We don't know which buildings' foundations have impurities and which do not; figuring this out will take months to years of forensic work.

In the mean time, some pretty large buildings, portions of large buildings, and some small buildings will likely collapse. These crumbling structures are worth a lot less than the market previously judged. Others will stand tall because the impurities were not introduced into the batches of cement used to form their foundations. These buildings are likely worth a lot more than the market currently judges. The challenge is to find a way to motivate global investors to buy some of the buildings (or, in some cases, portions of some buildings) in the city, which the government has taken on at taxpayers' expense.

It would also be prudent to:
• Identify who introduced the toxic impurities to the cement, exactly how much profit they pocketed for doing so;
• Find out which building inspectors fell asleep at the wheel or lacked the authority to prevent this shady practice;
• Extract financial restitution from the shady contractors; and then
• Rework the inspection system to better respond to the sort of toxic individual/organizational/sector-wide behavior that will inevitably crop up again.