Bush's invasion of Iraq caused the "sub-prime crisis".

Back in 2004 I was anticipating what is happening now. We sold our several properties and concentrated the equity in one in order to reduce our exposure to debt and the risk of higher interest rates. I was certainly quick off the mark in taking action, but definitely not wide of it. I wasn't sure exactly "when", but the "if" of higher interest rates and more inflation was being converted into a sometime "when" as the tanks rolled toward Baghdad. George W Bush's tax cuts certainly didn't help any either, as they contributed to the growth of the US government fiscal deficit, instantly wiping out the surpluses of the Clinton years. It was suspected the goal was to create deficits that would allow the Social Security fund to be dismantled or reduced in scope, creating more business opportunities for private insurance funds. Whatever. The deficits were duly created. Invading Iraq was like pouring petrol on the bonfire.

As the effects of the most recent consequence of the invasion - the US sub-prime crunch - continue to fall out, it's more and more like watching a slow-motion train wreck. The engine went off the rails in March 2003 and the rest just unfolded more or less as it would have in any case. Greedy bankers and myopic derivatives speculators, blind to the risk they were taking, merely helped decide exactly which links in the chain would pop first.

Like the slow motion train wreck, we're seeing stories of failures of institutions and funds, at first distant and seemingly irrelevant, become more numerous. As each succeeding car comes off the rails, the consequences of all this creep closer and closer to home. Each failure leads to trouble and strife for those further downstream.

Tower's "Mortgage Plus" fund closure detailed in this report by Bernard Hickey of JDJL / interest.co.nz is the latest of the local stories emerging from the property slump caused by higher interest rates and rising inflation combined with stagnant wages. Interesting to note Hickey's comments about Trustees Executors and related activities of mortgage brokers. I think we might expect to hear more from those organisations as time passes.



The sub-prime crisis is being blamed for all this, but it, in turn has its roots in the fallout from US President Bush's disastrous policies. Lest he hog all the blame, we should reserve a small share for those banks, greedy to the point of idiocy, who lent money to people with little equity who wouldn't be able to pay ballooning mortgage payments if rates rose. As banker after banker has said: "We never expected the interest rates to go crazy".

Why not? I did. Maybe not inevitable, but certainly highly likely. Worth being prudent about.

I'm no economics boffin. But I do study history and have a working knowledge of how the major chunks of the global money/banking system hang together. The effects on the global monetary system of the Vietnam War and the first two oil shocks provide insight into what is happening now.

The invasion of Iraq in 2003 lead to vastly increased oil prices and ballooning government spending on an utterly unproductive activity: war. Both are inflationary. Inflation is corrosive. Unlike Vietnam or the discretionary oil shocks of the early 70's, today there is no end in sight.

In order to fund the deficit and maintain the value of the US dollar, interest rates were raised for 11 straight quarters by the US Fed. The Fed was trying to quell inflationary pressures based on higher oil prices and attract funds, mainly from China, Korea and Japan, to fund the deficit. The higher interest rates resulted in rising costs for all businesses and consumers, especially those who held those "sub-prime" mortgages.

One can imagine they then found they had trouble with making ends meet due to the rapidly rising interest rates and rising cost of living. Daily expenses and "balloon" payments on sub-prime mortgages as they rolled over probably crept out onto credit card balances and eventually the total became unsustainable for ever-larger numbers of people, leading to large numbers of mortgage defaults.

The sub-prime crisis is a symptom. George W Bush's invasion of Iraq, combined with his tax cuts, is the root cause. If that money wasn't being wasted, interest rates would not have had to rise...and we would not be seeing what we are now seeing.

It was not impossible to see this coming. I didn't know exactly how or when, but I saw the risk of such a thing happening and prepared for it. Why couldn't the banks and people with a lot more economic and financial nous than me do the same?

A bigger question for me is how the people who started all this - Bush and his team of advisors - failed utterly to appreciate what the consequences of their actions would be. Maybe they really did believe Iraq would be all over in a few weeks and they could rake in the oil money ever after and never dreamed it would cost a trillion dollars with no end in sight.

If they believed that, they really were incompetent, dribbling idiots loose in a dynamite store with a pack of matches. If they didn't believe it, then we are now suffering the effects of one of the greatest acts of deliberate economic vandalism in recorded history.