The mortgage market is unchanged, credit available on old-fashioned agency terms and not much else. Rates are about the same, mid-sixes. For every tentative lender toe stuck back into scary water, another bather has run shrieking from the pool, or drowned. The same is true for general, nonmortgage credit: shrinking.

The Fed’s injections of short-term liquidity have succeeded in preventing the equivalent of a bank run, but otherwise … zilch. The discount-window theater has been as pointless as forecast here; borrowings as of Wednesday barely hit $1 billion. High-quality borrowers have more credit than they need.

The problem is credit quality, not liquidity. The world economy runs on financial innovation, not AAA antiques. The modern “structured finance” market has locked up in a loss of confidence in the value of outstandings, and inability to value new issuance.

The financial world has been waiting all week for a speech this morning by Fed Chairman Ben Bernanke. He has been painfully silent in office, which doubles the discomfort when he does speak and whiffs.

The speech begins with three pages describing the current situation in daily newspaper content. One line stands out: “Obviously, if current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the broader economy. We are following these developments closely.” Key word: “following.”

The next five pages are a tour through mortgage Jurassic Park that might get a passing grade in sophomore macro. When the chairman cruised past Depression-era structures (FHLB, FHA, FNMA), he might have noted the crucial elements of liquidity created then whose absence in modern structured finance have caused today’s wreck. Transparency, homogeneity, underwriting, credit guarantee — down that conceptual road lie creative solutions to the dangerous lock-up at hand.

Instead, Bernanke closed with an offensive paragraph assigning blame for bad mortgage lending: “… Most loans are securitized, and originators have little financial or reputational capital at risk. …” True for some, sir, but hardly most. I’ll look after my reputation; you had best tend to yours.

Aside from its contemptible aspect, the chairman’s assessment reveals blindness to the source of trouble: a large volume of very good and very foolish financial products created on the Street to satisfy demand by an unprecedented pool of global savings. If every mortgage made since 2000 had been underwritten strictly within the guideline of the Street inventor/securitizer/buyer, today’s problem would be undetectably smaller. Subprime loans are deadly by structure, not slipshod or fraudulent processing; no-equity households will defy workout by this new FHA effort, or any other.

Those foolish products, mortgage and nonmortgage, and the world’s reliance on them for both consumption and investment — that’s the two-part problem at hand.

First, we need the credit supply from the better fraction of the innovative products, but that is shut off along with the bad. Nothing in the Fed’s traditional measures so far has helped to restore supply, and rate cuts, even big ones, may not necessarily work. Starved of credit, consumption and the economy are at risk.

The second problem is by far the more dangerous. Structured-finance products all over the world are crashing in value or cannot be valued at all. Frequently leveraged, the fall in value is a balance-sheet risk both to investors and their lenders. Bernanke’s silence on this risk is unaccountable. I had hoped to hear some attempt at outside-the-box central banking to match the financial-market innovation that left the Fed at the station 10 years ago.

One cheerful thought: the longer it takes for the Fed to get a grip, the uglier it will get, and the bigger the refinancing party for surviving lenders and those who still own their homes.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at

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