A “potent cocktail of easy money and exotic mortgages”

From MoneyWeek:

Why reckless use of credit will cause financial disaster

Man greatly extended his domain by learning to consume energy he did not create. In financial terms, he has accomplished a similar thing. He has learned how to consume income not yet earned. When a man (or woman) signs on the dotted line for a 30-, 40-, or even 50-year mortgage (thank you California), he is committing a stream of future earnings to a purchase. The money to be paid usually has not yet been earned; for all intents and purposes, it does not yet exist. Financial leverage, like fire, allows man to access a power source external to himself. The fact that homeowners all across the Western world can do this, and think little of it, is a great testament to the power of innovation. The invention and explosive proliferation of the mortgage, in its own way, is as meaningful an advance as England’s transition from wood to coal in the High Middle Ages.

Unfortunately, we are on track to relearn a painful lesson: Financial disasters can be just as ugly as environmental ones. The first may be caused by careless use of leverage, the second by careless exploitation of resources on a grand scale; depending on how you look at it, these are two sides of the same coin. In both cases, lax attitudes, lolling complacency, and rampant greed are often to blame.
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The literal translation of the word “mortgage” is along the lines of “engagement till death.” That is an appropriate description of what late-to-the-party homeowners now face, particularly those saddled with adjustable rate mortgages (ARMs). Some homeowners, faced with the reality of upside-down properties and upside-down lives, will choose financial death – bankruptcy – over the prospect of indentured servitude. Keys will be left in mailboxes. Politicians will foam and froth. Bernanke will call in the helicopters. And gold, of course, will skyrocket.

The credit-driven housing bubble fiasco, enabled by a potent cocktail of easy money and exotic mortgages, is an example of what happens when the hay bales are stacked recklessly and haphazardly. In his lust to conquer new vistas of consumption, man has constructed a financial Tower of Babel. At this point, we can only hope to glean knowledge (and profit) from its collapse.