Official news over the last several weeks that lenders from Countrywide (CFC : CFC35.24, +0.02, +0.1%) to Freddie Mac (FRE : FRE61.06, +0.51, +0.8%) would be tightening their lending standards in the subprime sector of mortgage originations positively begs the question: what's changed?

But before we can attempt to limn even the faint outlines of the answer, we need to countenance the conclusion that such question asking as: "Do you have an income?" and "Can I see proof?" has one and only one effect on credit supply and demand: a decrease.

And that means liquidity is drying up in the mortgage market.

The particular exit strategy of someone-will-buy-it-from-me-at-a-higher-price rests squarely on the next Mensa reject wrestling the required funds from a banker before he can exercise his herding instinct, sate his brain stem, and flood his circulatory system with endorphins. And if those bankers are now equipped with stethoscopes as they claim, that next buyer won't ever get his golden ticket. Which means someone is stuck with $2,350 per month in maintenance, taxes, insurance, and mortgage costs on an 'investment property.' And $3,775 when the re-set comes in late 2007.

When home prices stopped going up 12-18 months ago, the frustration was palpable but hardly fear inducing. Timelines were stretched for ROI, 'we'll use it as a vacation home' rationales started flooding forth, and travertine backsplashes suddenly went wanting. But things are different now, measurably so. And that difference is not just that the demand for credit to speculate on housing has declined. It's that supply is now contracting. And when a credit cycle starts seeing supply contract (liquidity declining), all sorts of things start to happen: speculation gets robbed to pay a tax to prudence.

But, really, what has changed? What has really changed?

It's not as if bankers don't have money laying around to extend or sweeten the terms of the new loans these home speculators now need. Hell, the Fed and Treasury just need to print it into existence. And certainly Senator Dodd has played his cards: he thinks Congress should help 2.2 million home owners who are getting squeezed from buying a home they couldn't afford in the first place (and apparently who are not English speakers also because existing federal regulations demand that every possible term and contingency in lending be laid out for borrowers).

So you have the Federal government's legislative AND executive branches (if you know which branch the Federal Reserve comes under please email me) wanting to help these folks. But, still, liquidity wanes.

Why? Time preference. Specifically aggregate time preference.

The bankers who sign the checks, the appraisers who value the property, the retiree who speculates on the property, the investment bank that pools the mortgages and tranches them, the rating agency that rates those pools, the other investment bank that securitizes the tranches, the rating agency that rates those securitized pools, the other investment bank that sells insurance on the securitized tranches, the pension/hedge fund that buys the pools/tranches/securitizations. All have the means to keep the game going - to effectively go back in time to the halcyon days of 2004 or the even the salad days of 2005. But that's not what's happening.

And it's not going to happen either. Whomever it was that first came to his/her senses in this credit madness is moot; it's the fact that his/her action -- that mortgage banker, that CDO trader, whoever -- catalyzed the opposite trend toward probity. After an orgy of credit-based risk taking, incented in almost every conceivable fashion by monetary and social institutions, the negative feedback effects of reduced liquidity are almost certain now to run their course in the opposite direction with potentially equal (or greater) costs. Booms turn to busts not because something 'happened.' They turn to bust because there is simply no other path.

It is said that when men go mad they do so all at once. But they gain their sanity slowly and one by one.

That credit supply is being tightened means we've passed the 'one-by-one' stage and we're approaching 'all-at-once