“Cane toad the size of a small dog found” we read in this morning’s paper. We saw a picture of the fat freak on-line. What a lovable oaf. The male toad weighs 861 grams and is the largest ever to be caught. It’s 20.5cm long and was caught, and these are not our words, in a “breeding frenzy.” Hmm.
What is the difference between a “breeding frenzy” and a “subprime lending frenzy” we immediately wondered? The cane toad and the subprime loan are not so very different. In their natural habitat, both have a non-disruptive place on God’s green earth.
But the cane toad is not native to Queensland. It was introduced in 1935 as a way to control scarab beetles. The scarab beetles were destroying the local sugar cane crop and so the toads were introduced to destroy the beetles. That more or less worked. But the problem is that the cane toads (sort of like your editor) are not from around here. They have no natural predators to control their own breeding. And they are full of toxins.
When you take a species out of one ecosystem and drop it into the middle of another, hilarity and tragedy ensue. Cane toads are now a pestilence, and the toxins in their skin have had a less than desirable result on local fauna and flora, which have themselves evolved over hundreds of thousands of years, without having to defend against or accommodate for the cane toad. Until 1935.
Are subprime loans any different? They too, have their natural place in the financial ecosystem. Lenders have been making high-risk loans ever since the first lenders lent, we imagine. But making a $600 billion business out of lending to people who have little experience with credit, well that seems downright dangerous, sort of like introducing a new species into a new ecosystem.
Subprime lenders—who at one time “empowered the economically disadvantaged to achieve the dream of home ownership,” are now described as “predatory lenders.” We’d submit that the nature of the lender hasn’t changed at all. But the public’s perception has. The lender is always in it to make a living of the borrower without killing him.
When bad loans multiply like cane toads, the entire industry becomes toxic. Dogs that eat cane toads often die a painful death, frothing at the mouth. Will the same be true of pension funds, insurance companies, and banks that have “digested” subprime loans? Or did the market “price that in” already?
We’ll have to wait and see. But really, nature already shows us what happens when you put two things in proximity together which did not naturally evolve side by side. They do not peacefully co-exist. One tends to destroy the other. It pursues its competitive advantage ruthlessly while the other fails to, or cannot adapt. An unnatural cause produces a very natural result.
And speaking of unnatural things, we have only two more quick items. First, a few years ago there was a picture circulating around the Internet of a Burmese Python that had swallowed an alligator in the Florida Everglades and then exploded, unable to digest the beast.
The “problem” was completely man made. Reptile collectors had begun collecting the pythons because they were attractive looking (as far as snakes go.) But cute baby snakes grow up to be cute, huge adult snakes.
The largest Burmese python in captivity grew to a weight of 184 kilograms and was nearly eight meters in length. In its natural South East Asian habitat, the snake is what’s called an Apex predator. It is a bad-ass of the natural world, with no real enemies.
But Florida is not the natural habitat of the Burmese python. There is already an Apex predator in the Florida Everglades. It’s called an alligator. And it’s such a perfect beast that nature has not seen fit to alter it one bit it the last few million years of evolution.
What happens, then, when you put two Apex predators in the same ecosystem? For all you AFL punters out there, it’s a push. No wins. Mutually assured destruction, which is what happens when borrowers can’t pay lenders. Both are doomed.
A few years ago, scientists found evidence of a fight between a Burmese python that had been released into the Florida wild and an unlucky alligator. The idiot owners of the snake let it loose when it got too big and eventually, it found itself competing for the same resources as a local alligator.
Try as they might, neither animal had a predatory advantage over the other. It was not a match-up Mother Nature had conceived of or even intended. You had two species that had evolved over millions of years in different ecosystems suddenly meeting one another in a dark, reedy alley in the backwaters of Florida.
The snake eventually ate the alligator, killing it. And then the alligator killed the snake, unintentionally, when it proved too large for the snake’s digestive track. The snake exploded.
Subprime loans should never have been made to people who couldn’t afford a down payment in the first place. Making credit available to people with marginal incomes and no savings was exactly the wrong thing to do, and one of the worst ways to do it. The explosions in the market, and in millions of financial lives, are the result.
The interesting question now is, how much of the world you can apply this metaphor to? Exotic credit products are in the bellies of a lot of banks right now and on the balance sheets of many others. Are they toxic too? Sit back and watch for the exploding snake. You’ll find out soon enough.
And finally, we meant to say more about 1935. Not only was it the year the cane toad was introduced to Queensland, it was the year of a major reform in the Federal Reserve Board of the United States, when control over America’s money moved into the hand of a small group of un-elected private bankers in Washington. It’s the beginning a whole new kind of monetary eco-system, equally unnatural, and possible perverse. But we’ll write more on that later.
Markets and Money