The Carnage on Wall Street is All About the Great Housing Slump.

Paul Krugman has a good column in the New York Times (http://www.nytimes.com/2007/11/23/opinion/23krugman.html?em&ex=1195966800&en=3aec75ee4c87fe35&ei=5087%0A) that looks at how the country arrived where it is in terms of the housing market/mortgage industry melt down. He likewise focuses on the fact that many of those responsible are getting a free pass in terms of NOT being held accountable. Here are some highlights:

“What were they smoking?” asks the cover of the current issue of Fortune magazine. Underneath the headline are photos of recently deposed Wall Street titans, captioned with the staggering sums they managed to lose. The answer, of course, is that they were high on the usual drug — greed. And they were encouraged to make socially destructive decisions by a system of executive compensation that should have been reformed after the Enron and WorldCom scandals, but wasn’t.

In a direct sense, the carnage on Wall Street is all about the great housing slump. This slump was both predictable and predicted. “These days,” I wrote in August 2005, “Americans make a living selling each other houses, paid for with money borrowed from the Chinese. Somehow, that doesn’t seem like a sustainable lifestyle.” It wasn’t. But even as the danger signs multiplied, Wall Street piled into bonds backed by dubious home mortgages. Most of the bad investments now shaking the financial world seem to have been made in the final frenzy of the housing bubble, or even after the bubble began to deflate.

Now the bill is coming due, and almost everyone — that is, almost everyone except the people responsible — is having to pay. The losses suffered by shareholders in Merrill, Citigroup, Bear Stearns and so on are the least of it. Far more important in human terms are the hundreds of thousands if not millions of American families lured into mortgage deals they didn’t understand, who now face sharp increases in their payments — and, in many cases, the loss of their houses — as their interest rates reset. And then there’s the collateral damage to the economy.

[B]ad housing investments are crippling financial institutions that play a crucial role in providing credit, by wiping out much of their capital. In a recent report, Goldman Sachs suggested that housing-related losses could force banks and other players to cut lending by as much as $2 trillion — enough to trigger a nasty recession, if it happens quickly. How did things go so wrong?

Part of the answer is that people who should have been alert to the dangers, and taken precautionary measures, instead blithely assured Americans that everything was fine, and even encouraged them to take out risky mortgages. Yes, Alan Greenspan, that means you. But another part of the answer lies in what hasn’t happened to the men on that Fortune cover — namely, they haven’t been forced to give back any of the huge paychecks they received before the folly of their decisions became apparent.

The point is that the subprime crisis and the credit crunch are, in an important sense, the result of our failure to effectively reform corporate governance after the last set of scandals.