Unauthorized municipal expenditures - Record - Christie subpoenas Paramus records

Published in the Bergen Record, Monday, October 6, 2008

[Funds transferred without Council approval; Christie subpoenas]

Affordable housing funds shifted

Monday, October 6, 2008
Last updated: Monday October 6, 2008, EDT 6:43 AM

BY MICHAEL GARTLAND

STAFF WRITER

 

Paramus Mayor James Tedesco authorized the transfer of nearly $4 million in affordable housing funds without obtaining the Borough Council's approval, an apparent violation of affordable housing rules, public records show.

Council approval for borough expenditures is required under state guidelines, said Chris Donnelly, a spokesman for the New Jersey Department of Community Affairs.

Tedesco, a Democrat who became mayor in 2003, ordered the largest transfer — $3.6 million — from the affordable housing fund to the Paramus Affordable Housing Corp. in January 2004, according to municipal records. The rest of the money was allocated in three smaller transfers over several years.

Tedesco, who also is president of the non-profit PAHC, offered only a written statement conveyed through Keith Furlong, the borough's spokesman.

"If the borough did not adopt any specific resolutions, this was an oversight," Tedesco said.
His Republican predecessor, Cliff Gennarelli, ordered a similar transfer, but for a much smaller sum, $100,000. Gennarelli did not respond to requests for comment.

The U.S. Attorney's Office has served at least two subpoenas related to the borough's affordable housing program. The non-profit received one in August and the borough received one in July.

It is unclear what specifically drew federal attention.

Much of the overall $4 million transferred to PAHC eventually went to contractors, whose role in building affordable housing in Paramus is unclear.

The money eventually made its way to Paramus Affordable Development LP, a for-profit company that disbursed borough, county and state funds to contractors for a 46-unit project completed in 2005.

A significant portion of the project's funding — $3.6 million — came from the borough itself. Bergen County paid $900,000, and the state provided about $4.4 million.
The state guidelines also bar a mayor from formal involvement in releasing affordable housing funds, Donnelly said.

"The town council authorizes expenditures," he said. "The CFO would ultimately execute them."
The borough did not provide any council resolutions authorizing the transfers, despite several public records requests by The Record. Instead, it provided four resolutions that did not specifically authorize the transfers.

$3.6M mystery

Council members who served in 2004 also did not recall voting to release the $3.6 million. Former council members Sandra Gunderson, Joe D'Ambrozio and Connie Wagner, who is now an assemblywoman, said they did not remember allowing that sum for affordable housing.
"When it came to affordable housing, I saw virtually nothing," Gunderson said.

The current council president, Frank Ciambrone, also served on the council at the time. He did not respond to several calls for comment.

In a letter to Paramus Chief Financial Officer Joseph Citro on Jan. 6, 2004, Tedesco requested that $3.6 million be moved from the borough to the PAHC account "as per the agreement approved by Dennis J. Oury LLC."

Oury was Paramus' borough attorney in 2004. State records also list him as the registered agent for PAHC.

State records held by the Department of Community Affairs show that $3.6 million was transferred, but federal tax records show no record of $3.6 million coming into or going out of PAHC in 2004.

Tax law experts could not reconcile the contradiction. Victoria Bjorklund, former chairwoman of the IRS Advisory Committee on Tax Exemption, said that if the non-profit received $3.6 million — as state records indicate — then, by law, the money would have to appear on the tax form.
"All the contributions should be shown," she said. "It should show up at least on the balance sheet as funds that came in. If it came in and went out the same day, it should still show up."

Oury involvement 

Oury resigned as counsel for the Bergen County Democratic Organization last month after he and BCDO Chairman Joseph Ferriero were indicted by a federal grand jury on eight counts of fraud conspiracy not related to Paramus.

The indictment accuses them of using political influence to gain contracts for a consulting firm in which both had financial stakes. Oury's attorney, Gerald Krovatin, did not return calls for comment.

The accountant who handled PAHC's 2004 tax return, as well as the returns in 2003 and 2006, was William Katchen, according to the tax records. He, too, did not respond to several requests for comment.

46-unit project 

The U.S. Department of Housing and Urban Development slapped Katchen with a one-year suspension from federal housing work in 1990 after the Passaic Housing Authority misspent $1.7 million in taxpayer money. He was the authority's accountant.

After money was released to PAHC, state records show it went into an escrow account held by the New Jersey Housing and Mortgage Finance Agency.

The mortgage agency then released the money to Paramus Affordable Development LP, the for-profit company that disbursed funding for the 46-unit project.

Eugene Walsh is president of Paramus Affordable Development LP, a company that shares an address with four of those contractors:

* Penwal Affordable Housing Corp. (non-profit): Walsh and Laury Pensa, directors.
* Canyon Capital Corp. (for profit): Pensa, president, incorporator, agent.
* Summit Capital Corp. (for profit): Pensa, president, incorporator, agent.
* Steamboat Corp. (for profit): Walsh, president; Pensa, agent and incorporator.

Steamboat received a $976,500 development fee from Paramus Affordable Development for a project with an $8.1 million budget, according to records provided by the state. Canyon received at least $44,000, and Summit took in at least $5,000.

Development fee 

In a financial disclosure form filed with the state's Housing Mortgage and Finance Agency, Walsh wrote that Penwal — which, according to its tax form, has "implemented and developed low-income housing projects in Dumont, Garfield, Jersey City and Paramus" — would get the development fee. He did not mention his interest in Steamboat on the form.

Other records obtained from the state mortgage agency show that the development fee went to Steamboat.

A financial disclosure form submitted to the state for Steamboat does not list Walsh or Pensa's interest in Penwal or Paramus Affordable Development LP. Pensa's signature appears on that financial disclosure statement.

In addition, a public records request submitted to HMFA by The Record showed that disclosure statements for Penwal and Canyon Capital were not filed with the agency.
Walsh and Pensa did not return calls about the payments.

Bergen County's United Way President Tom Toronto, who has experience with state-funded affordable housing projects, said development fees are a common cost of such projects. He also said any changes regarding development fees would have to be approved and recorded by HMFA.

"HMFA has to bless it each step of the way," he said. "Otherwise, the money wouldn't flow."

E-mail: gartland@northjersey.com

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Market Crisis of 2007 - NY Times - Primer on CDOs and Credit Derivatives

Published in the New York Times, Friday, August 31, 2007

News Analysis
Why a U.S. Subprime Mortgage Crisis Is Felt Around the World

By JENNY ANDERSON and HEATHER TIMMONS

The evening entertainment for roughly 500 financial executives at the Deutsche Bank global derivatives conference last month in Barcelona did not come cheap — the Rolling Stones reportedly were paid more than $5 million.

“The best part is, it’s coming out of your bonuses,” Mick Jagger joked to the crowd.

The hosts of the conference could well afford it. After all, the business of creating new finance vehicles like derivatives and structured products has exploded in recent years. And at the time of the conference, there remained a mostly rosy view of such instruments, because of their ability to help businesses and investors spread out risk.

But the global financial turmoil — set off by problems with subprime mortgages — has prompted a backlash in some quarters against such financial engineering.

More broadly, it has led to a better understanding of the downside of spreading risk so well — it can be felt in all corners of the world, unsettling hedge funds, banks and stock markets as far away as Australia, Thailand and Germany. In effect, reducing risk on a global scale appears to have increased it for some players.

“The market appears to be finding it harder to truly understand the inherent and underlying risks involved,” said Chris Rexworthy, who was a regulator with the Financial Services Authority in Britain for 10 years before moving recently to the private sector.

The backlash is particularly sharp abroad, in countries that were surprised to find that problems with United States homeowners could be felt so keenly in their home markets. Foreign politicians and regulators are seeking a role in the oversight of American markets, banks and rating agencies. The head of the Council of Economic Analysis in France has called for complex securities to be scrutinized before banks are authorized to buy them.

In the United States, regulators appear to think that the new and often unregulated investment vehicles — which have shrunk the world and speeded up business in much the same way as the Internet — are not all inherently flawed.

This opinion is captured in an analogy offered by Peter Douglas, the founder of GFIA, a hedge fund research firm in Singapore. He likens using derivatives to power tools. If you know how to use them, he said, they are exponentially better and faster for building a house, compared with using hammers, screwdrivers and handsaws.

If you don’t, “you could drill a hole in your head," he said.

Funds and banks around the world have taken hits because they purchased bonds, or risk related to bonds, backed by bad home loans, often bundled into financial instruments called collateralized debt obligations, or C.D.O.’s.

The losses have often surprised the investors, and in some cases the funds and the executives of the banks, who were unaware of the extent of their risks.

The crisis extended as far as the $2.2 trillion money market that finances the day-to-day operations of businesses, as investors wondered whether the underlying assets were sound. “It’s amazing how much ignorance and fear are out there,” said Kevin Davis, a professor of finance at the University of Melbourne.

The confusion about these products lies in part in their complexity. Structured products are pooled assets that have been sliced and diced into ever more smaller, more specialized pieces.

They offered investors higher returns at a time when traditional fixed income, or debt-related products, were producing low returns.

As low interest rates fueled a lending boom to borrowers with weak credit, banks looked for new ways to package those loans, so they could sell more. A central building block to offset the risk was asset-backed securities, which are bonds backed by pools of mortgages or other income-producing assets, like student loans, auto loans, and credit card receivables.

Banks and other financial institutions pooled those asset-backed securities into new units, dividing them up again and issuing securities against them, creating collateralized debt obligations.

The idea took off, with new combinations that were further removed from the original asset. New creations included C.D.O.’s of C.D.O.’s, called C.D.O.-squared. There is even a C.D.O.-cubed.

According to JPMorgan, there are about $1.5 trillion in global collateralized debt obligations, and about $500 billion to $600 billion in structured-finance C.D.O.’s, referring to those made up of bonds backed by subprime mortgages, slightly safer mortgages and commercial mortgage backed securities.

Many of the products have proved to be highly problematic as the underlying assets — the subprime mortgages — have gone bust, revealing dangerous amounts of leverage in the securities that few people could value. As a result, they have become like a potent computer virus, leaving many people fearful that they too will be affected.

“A lot of risk in the subprime asset-backed market is embedded in, and amplified by, C.D.O.’s,” said Rod Dubitsky, head of asset-backed research at Credit Suisse.

Weaknesses in the system were laid bare, including ratings that did not accurately reflect risk and faulty assumptions on how diversified pools with multiple layers of leverage would react.

That in turn spooked investors in other markets, who started selling anything they thought might be risky, from stocks to loans, and in some cases putting their money into cash.

The combination of a subprime shock, “untested financial innovation and leverage has led to a confidence crisis,” said Pierre Cailleteau, Moody’s Investors Service chief economist in London.

The advent of radically more complex structured products coincided with another trend in finance: the explosion of credit derivatives, financial tools that enabled institutions like banks and hedge funds to try to hedge exposure to the huge credit market, like loans to corporations.

“Credit derivatives are the fastest-growing part of any bank,” says Derek Smith, head of flow credit trading at Deutsche Bank. He cited 80 percent growth in 2007 for his firm and average annual growth of about 40 percent for the industry.

Blythe Masters, a veteran of the credit derivatives revolution and the head of global derivatives at JPMorgan Chase, added, “There has been a wall of money coming at the credit markets in the past five years.”

Credit default swaps (what are widely known as a credit derivatives) allow two parties to exchange the credit risk of an issuer, such as a company. For example, if an investor buys a credit default swap on General Motors, called buying protection, he or she makes money when the credit weakens and makes a lot of money if G.M. goes bankrupt.

In the meantime, the seller of protection makes a fee from the buyer and profits if the company’s credit improves.

Credit derivatives radically shifted the financial landscape for two reasons: they allowed banks to hedge some of their exposure to the huge loans they give corporations, and they have allowed investors to bet against, or short credit, as a hedge and to speculate.

For banks, shedding exposure to the credit risk of companies, or governments, or individuals, means not having to reserve as much capital for potential losses. That frees up capital to make even more loans — to homeowners, institutional investors, corporations or hedge funds.

The banks found a perfect partner in hedge funds, lightly regulated pools of capital with high fees that were looking for better returns. Insurance companies and pension funds also sought the higher returns, called yield, as interest rates hit historically low rates.

“Fundamentally, having 100 or 1,000 people with a slice of the risk is better than a bank holding 100 percent of the risk,” said Robert G. Pickel, chief executive of the International Swaps and Derivatives Association.

As the market for C.D.O.’s backed by structured products choked in recent weeks, the overall credit derivatives market has performed well, say some industry participants.

“Credit derivatives have done a good job at doing exactly what they should do: they have accurately and immediately reflected the markets’ pricing of risk throughout this crisis,” Ms. Masters said. But there has been a lot of pain. Investors purchasing derivatives are making a bet that the underlying stock or bond or loan is going to rise or fall, but they do not own it. Because buying a derivative requires much less capital than buying the loan or bond it is derived from, banks and traders can buy more of them than they could loans or bonds. That can translate into huge gains — or, in times of stress, outsize losses.

Some institutions are not parsing what products are riskier than others, but rather they are rushing for the door. First State Investments in Singapore has slashed its holdings in all Asian financial firms in recent weeks.

At this point “it doesn’t really matter what their exposure is” to subprime products through derivatives, said Alistair Thompson, the deputy head of Asia-Pacific equities at First State. “What concerns us is the sentiment” in the market, he said.

The surprises are certainly not over: there were whispers among investors in Australia this week that some local funds were still turning up unexpected subprime exposure because of credit derivatives, weeks after the problems first surfaced.

While that happens, markets are sure to remain skittish.

“Liquidity can just be turned off, and essentially it is a confidence game,” Mr. Thompson said.

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Market Crisis of 2007 - Economist - Policy: What would Bagehot do?

Published in The Economist, Thursday, August 16, 2007

Economics focus
What would Bagehot do?
Should central banks act as buyers of last resort?

Aug 16th 2007
From The Economist print edition


HOWEVER much marble they lay in their foyers, banks have typically been brittle institutions. They borrow short (collecting deposits or short-term loans that might have to be repaid quickly) and lend long (making loans that cannot easily be converted into cash at anything close to their value to the bank).

A bank is solvent if its assets are worth more than the money it owes to its depositors and creditors. As long as its depositors believe that their money is safe, their faith is rewarded. But even a solvent bank can be broken by a bank run. If depositors fear that others will withdraw their money, making claims on the bank's reserves of cash, nobody will want to be last in line. Since a bank cannot redeem more than a fraction of its deposits at any one time, the depositors' rush to escape with their money paradoxically ensures that some of them will lose it.

The damage may not stop there. A run on one bank can shake faith in another, if only because depositors have no reliable way to distinguish between sound and unsound institutions. As the banking system comes under threat, the supply of credit to businesses and households will be interrupted. And since cheques and other payments are often drawn on bank accounts, the payments system can come under strain.

In “Lombard Street”, his 1873 account of the money markets, Walter Bagehot urged the Bank of England to stave off such panics by lending “quickly, freely and readily”, at a penalty rate of interest, to any bank that can offer “good securities” as collateral. When this newspaper laid out these principles in September 1866, they were described by a director of the Bank of England as “the most mischievous doctrine ever broached in the monetary or banking world in this country”.

But as Bagehot pointed out, by lending liberally, central banks make it less likely that their money will be needed. By demanding good collateral, the central bank can try to distinguish insolvent banks from illiquid ones; and by charging a penalty rate of interest, it ensures that it is truly the lender of last resort.

Bagehot's mischievous doctrine is now conventional wisdom among central banks, as last week's events dramatically demonstrated. First the European Central Bank and then the Federal Reserve intervened liberally, lending against good collateral. They departed from Bagehot only in not charging a penalty rate.

Bank architecture has moved on since Bagehot's day: neo-classical columns giving way to glass atriums. Their position in the financial architecture has also changed. Companies that would once have turned to a bank for an overdraft or a loan now sell paper or bonds to the market. Home mortgages are now bundled into securities and sold on.

But as the past few weeks have shown, the financial system remains brittle. Hedge funds, for example, have ventured into thinly traded securities, such as collateralised-debt obligations (CDOs), that nowadays are easy to dispose of only in the mathematical models they use to value them. On the other side of the balance sheet, the funds have short-term financing from multiple sources. If a fund starts to show losses, its backers may lose faith in its trades. But even if they believe it will eventually make money, they might grow nervous about the fund's other backers. Just like a nervous depositor eyeing the queues in front of a bank, one hedge-fund creditor may demand its collateral before everyone else grabs theirs. If, to muster collateral, a fund is forced to sell assets into a falling market, a profitable trade can quickly become unprofitable. In this way, seasons of alarm “beget the calamities they dread,” as Bagehot put it.

Should anyone else care? Some of the buyers of CDOs are big enough that their failure can hit the banks that sponsor or finance them. It could also cause the credit markets to seize up, interrupting the provision of finance to the economy. What would Bagehot do in such circumstances? Making it cheaper for banks to lend to each other is a rather indirect method of intervention. The Fed's rate cuts in the autumn of 1998, as Long-Term Capital Management, a big hedge fund, neared collapse, allowed banks to pick up the pieces as the capital markets came unstuck. But such tactics might not always do the trick.
The new mischief-makers

Willem Buiter of the London School of Economics and Anne Sibert of Birkbeck College, London, have advocated their own mischievous doctrine*. They think central banks should become “market-makers of last resort”, setting a price for securities that can no longer be sold on “orderly” markets because distress sales are pushing prices far below their fundamental value.

The central bank could make a market in CDOs, say, either by accepting them as collateral or by buying them outright. In either case, it would have to make up its mind about the underlying risk of such instruments and an appropriate penalty price. If it gets its calculations wrong, the central bank may lose money and face. But, the two authors say, preserving financial stability is more important than “covering the central bank's posterior”.

The bigger danger is that the central bank might make the next crisis more likely if it goes too far to protect investors' posteriors in this one. After all, they should anticipate that a security might not be easy to trade. But they won't deal with this “liquidity risk” if they can rely on the central bank to create a liquid market in whatever security has got them into trouble.

Banks, in return for the protection offered by a lender of last resort and by deposit insurance, accept restrictions on how far they can extend themselves. Mr Buiter thinks that hedge funds should not enjoy the protection of a central bank until they too are willing to accept analogous restrictions. In the meantime, perhaps they should lay more marble in their foyers.

* maverecon.blogspot.com/2007/08/central-bank-as-market-maker-of-last.html

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(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Plainfield Today, Plainfield Stuff and Clippings have no affiliation whatsoever with the originator of these articles nor are Plainfield Today, Plainfield Stuff or Clippings endorsed or sponsored by the originator.)

Market Crisis of 2007 - Economist - Risk: Surviving the markets

Published in The Economist, Thursday, August 16, 2007

Risk and the new financial order
Surviving the markets
The new financial order is undergoing its harshest test.
It will not be pretty, but it is necessary

Aug 16th 2007
From The Economist print edition


THE lifeguards had been scanning the horizon for an oil-price shock, a bankrupt buy-out or a terrorist attack. But when the big wave struck last week it surprised them by coming from inside the financial system and threatening to swamp an unlikely shore, the money markets where banks lend to each other to help cover their daily operations. Investors have been asking for years if the frantic innovation in finance, especially the securitisation of just about every form of debt into a tradable asset, was a way to spread risk efficiently, or whether this left the financial system prone to rare—but cataclysmic—failures. It looks as if investors are about to find out.

Over the past week central banks have lent tens of billions of dollars to restore confidence to the markets (see article). But it is already clear that this mess is about more than a bit of rash mortgage lending to Americans who were in the habit of falling behind with their monthly payments. Hedge funds and private-equity firms, kings of the boom, are nursing big losses. Debt markets that once handed out cash to all comers are tight or closed altogether. In almost every asset market, investors are scurrying to reprice risk—which mostly means to reduce it.

The gravest and most immediate threat is to the banking system. For the time being, banks no longer trust other banks enough to lend them money except on onerous terms; equally worryingly, they lack confidence that other banks will trust them if they want to borrow. It is alarming when the very outfits that exist to supply the economy with credit start to hoard it from each other. At best this tightens monetary policy; at worst, a shortage of cash will cripple the payments system and cause runs on otherwise solvent banks and businesses that cannot rapidly raise funds.

Underneath all the new technology and the fancy derivatives with strange acronyms is a dilemma as old as banking itself. Anyone who thinks that lending has been too loose—and many bankers do—should welcome a purge: better now than later when the imbalances would be bigger and the economy probably weaker. But if good banks fail and money for good companies dries up, the purge will wreak huge and wasteful damage on healthy parts of the economy. How likely is that?
Fear of the deep

Financial crises are always about the way people do business, and not just the deals they have struck. Yet this one goes deeper than most. The spreading panic has shown up weaknesses in some of the foundations of modern finance. The past 20 years have created untold wealth. As securities and markets have steadily taken the place of old-style bank managers, the number of potential investors has grown and the cost of capital has fallen. Much good has come of that.

But there is a price that is only now becoming apparent. Because lenders expected to be able to sell on the risk of default to someone else, they lent too easily. After all, they would not have to pick up the pieces. In theory, that risk should have been borne by the people best able to carry it. But with everybody having sold on the risk to everyone else—and the risk often being carved up, repackaged and sold again—nobody is sure where the losses are. The fear is that some risks ended up with those who least understood what they were getting into, and fear is a potent force in this disintermediated world. In the interbank market, every counterparty was potentially vulnerable. Even small amounts of bad credit can drive out good.

In theory, ratings agencies and mathematical models help investors price the risk they are taking on, even if the securities they are buying are scarcely traded. Yet when some supposedly good-quality assets proved to be worth little, people lost faith in the models and the ratings. Across the board, investors had failed to take account of how fast and how far asset prices fall when everyone wants to sell at the same time. Hard-to-sell long-term securities had been bought with short-lived debt, which left borrowers vulnerable to a change in sentiment every time the debt fell due. It does nothing to restore confidence when the biggest model-driven hedge funds had to get in new money. The people at Goldman Sachs lost a packet when something happened that their computers told them should occur only once every 100 millennia.
Reassess, reprice and then rebound

The retreat to a new level of risk was never going to be orderly or free of casualties. Neither should it be. Bankers and investors need to suffer precisely because the methods of modern finance have been found wanting. It sounds Darwinian, but the brutal demonstration that you pay for your sins is what leads the system to evolve. Markets learn from their mistakes. Only fear will spur investors to price risks better and get them to put more effort into monitoring their counterparties.

If these lessons are to sink in, central bankers must stand back—as, by and large, they have done. Every intervention now will be taken as a sign of what the regulators will do next time. If they bail out banks that have mispriced risk, the mispricing will continue. And when the central banks do step in, it should not be to save the financiers. The cost of intervention is warranted only to save the rest of the economy from the financiers' folly. By that test, central banks were right to lend money to the banks in recent days, because it ensured that a liquidity crisis did not become a solvency crisis. They may yet have to take over a failed bank, though only if that is needed to stop a run. It is still far too soon to cut interest rates.

Because this crisis taps so deeply into the newly devised structures of finance, anyone who says the worst is definitely over is either a fool or someone with a position to protect. As risk has become bewilderingly dispersed, so too has information. Nobody yet knows who will bear what losses from mortgages—because nobody can be sure what those loans are really worth. Nobody knows if tighter lending standards will oblige borrowers to raise more capital, triggering more sales in stockmarkets and more pain. Nobody knows how messy the inevitable bankruptcies will turn out to be. What markets need now is time to piece that information back together. Time before the next wave strikes.


Link to online story here. Archived here.

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Market Crisis of 2007 - NY Times - OpEd: Fed's Subprime Solution

Published in the New York Times, Sunday, August 26, 2007

Op-Ed Contributor
The Fed’s Subprime Solution

By JAMES GRANT

THE subprime mortgage crisis of 2007 is, in fact, a credit crisis — a worldwide disruption in lending and borrowing. It is only the latest in a long succession of such disturbances. Who’s to blame? The human race, first and foremost. Well-intended public policy, second. And Wall Street, third — if only for taking what generations of policy makers have so unwisely handed it.

Possibly, one lender and one borrower could do business together without harm to themselves or to the economy around them. But masses of lenders and borrowers invariably seem to come to grief, as they have today — not only in mortgages but also in a variety of other debt instruments. First, they overdo it until the signs of excess become too obvious to ignore. Then, with contrite and fearful hearts, they proceed to underdo it. Such is the “credit cycle,” the eternal migration of lenders and borrowers between the extreme points of accommodation and stringency.

Significantly, such cycles have occurred in every institutional, monetary and regulatory setting. No need for a central bank, or for newfangled mortgage securities, or for the proliferation of hedge funds to foment a panic — there have been plenty of dislocations without any of the modern-day improvements.

Late in the 1880s, long before the institution of the Federal Reserve, Eastern savers and Western borrowers teamed up to inflate the value of cropland in the Great Plains. Gimmicky mortgages — pay interest and only interest for the first two years! — and loose talk of a new era in rainfall beguiled the borrowers. High yields on Western mortgages enticed the lenders. But the climate of Kansas and Nebraska reverted to parched, and the drought-stricken debtors trudged back East or to the West Coast in wagons emblazoned, “In God we trusted, in Kansas we busted.” To the creditors went the farms.

Every crackup is the same, yet every one is different. Today’s troubles are unusual not because the losses have been felt so far from the corner of Broad and Wall, or because our lenders are unprecedentedly reckless. The panics of the second half of the 19th century were trans-Atlantic affairs, while the debt abuses of the 1920s anticipated the most dubious lending practices of 2006. Our crisis will go down in history for different reasons.

One is the sheer size of the debt in which people have belatedly lost faith. The issuance of one kind of mortgage-backed structure — collateralized debt obligations — alone runs to $1 trillion. The shocking fragility of recently issued debt is another singular feature of the 2007 downturn — alarming numbers of defaults despite high employment and reasonably strong economic growth. Hundreds of billions of dollars of mortgage-backed securities would, by now, have had to be recalled if Wall Street did business as Detroit does.

Benjamin Graham and David L. Dodd, in the 1940 edition of their seminal volume “Security Analysis,” held that the acid test of a bond or a mortgage issuer is its ability to discharge its financial obligations “under conditions of depression rather than prosperity.” Today’s mortgage market can’t seem to weather prosperity.

A third remarkable aspect of the summer’s troubles is the speed with which the world’s central banks have felt it necessary to intervene. Bear in mind that when the Federal Reserve cut its discount rate on Aug. 17 — a move intended to restore confidence and restart the machinery of lending and borrowing — the Dow Jones industrial average had fallen just 8.25 percent from its record high. The Fed has so far refused to reduce the federal funds rate, the main interest rate it fixes, but it has all but begged the banks to avail themselves of the dollars they need through the slightly unconventional means of borrowing at the discount window — that is, from the Fed itself.

What could account for the weakness of our credit markets? Why does the Fed feel the need to intervene at the drop of a market? The reasons have to do with an idea set firmly in place in the 1930s and expanded at every crisis up to the present. This is the notion that, while the risks inherent in the business of lending and borrowing should be finally borne by the public, the profits of that line of work should mainly accrue to the lenders and borrowers.

It has not been lost on our Wall Street titans that the government is the reliable first responder to scenes of financial distress, or that there will always be enough paper dollars to go around to assist the very largest financial institutions. In the aftermath of the failure of Long-Term Capital Management, the genius-directed hedge fund that came a cropper in 1998, the Fed — under Alan Greenspan — delivered three quick reductions in the federal funds rate. Thus fortified, lenders and borrowers, speculators and investors, resumed their manic buying of technology stocks. That bubble burst in March 2000.

Understandably, it’s only the selling kind of panic to which the government dispatches its rescue apparatus. Few object to riots on the upside. But bull markets, too, go to extremes. People get carried away, prices go too high and economic resources go where they shouldn’t. Bear markets are nature’s way of returning to the rule of reason.

But the regulatory history of the past decade is the story of governmental encroachment on the bears’ habitat. Under Mr. Greenspan, the Fed set its face against falling prices everywhere. As it intervened to save the financial markets in 1998, so it printed money in 2002 and 2003 to rescue the economy. From what? From the peril of everyday lower prices — “deflation,” the economists styled it. In this mission, at least, the Fed succeeded. Prices, especially housing prices, soared. Knowing that the Fed would do its best to engineer rising prices, people responded rationally. They borrowed lots of money at the Fed’s ultralow interest rates.

Now comes the bill for that binge and, with it, cries for even greater federal oversight and protection. Ben S. Bernanke, Mr. Greenspan’s successor at the Fed (and his loyal supporter during the antideflation hysteria), is said to be resisting the demand for broadly lower interest rates. Maybe he is seeing the light that capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich.

In any case, to all of us, rich and poor alike, the Fed owes a pledge that it will do what it can and not do what it can’t. High on the list of things that no human agency can, or should, attempt is manipulating prices to achieve a more stable and prosperous economy. Jiggling its interest rate, the Fed can impose the appearance of stability today, but only at the cost of instability tomorrow. By the looks of things, tomorrow is upon us already.

A century ago, on the eve of the Panic of 1907, the president of the National City Bank of New York, James Stillman, prepared for the troubles he saw coming. “If by able and judicious management,” he briefed his staff, “we have money to help our dealers when trust companies have [failed], we will have all the business we want for many years.” The panic came and his bank, today called Citigroup, emerged more profitable than ever.

Last month, Stillman’s corporate descendant, Chuck Prince, chief executive of Citigroup, dismissed fears about an early end to the postmillennial debt frolics. “When the music stops,” he told The Financial Times, “in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

What a difference a century makes.

James Grant, the editor of Grant’s Interest Rate Observer, is the author of “Money of the Mind.”

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