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My Economical Musings

Submitted by Ryan on Fri, 09/26/2008 - 19:56.

So, unfortunately I must provide the caveat up front that I have not studied economics. It's not standard fare in a Biblical Studies program (sadly, neither was math Sad). This may result in some statements that are patently ridiculous below, but I'm going to put them out there and will happily accept correction in the comments!

Observing the news coverage of the credit crunch and now the meltdown of some major banks, I can't help but feel like a very scary word is absent from most stories or else only partially applied. Accountability. Some are happily blaming this bland "Wall Street" figure or the person of "George Bush" (or his "Government") who must be responsible for the crisis since he's president. So... maybe each of them had a part in it, but what about the consumer? What about the Americans continuing to pile on the debt that they later have to default on? Geez... what about those who happily turn their backs on their debts?

It seems to me that yes, businesses are at fault for making risky investments in sub prime mortgages and elsewhere. They've made risky investments with no way to manage the risk, and now that their gambles failed we're all feeling the crunch. Equally yes, consumers are at fault for making poor choices. Most people taking out mortgages can choose where to live, but it seems a lot of people consistently choose to live above their means and so contribute to the growing piles of bad debt. I'm not sure what part the government played in the meltdown, but I think I prefer non-interference since we're talking here about risky personal investments. Oh, but wait... there are Fannie Mae and Freddie Mac enabling these companies to keep on creating bad debt. Ahh, no small part indeed.

So, here's a system based on the continual accumulation of debt. Only now people aren't able to pay off the debts they have and are realizing they should stop acquiring more. All of the sudden, the government is rushing in to bail everyone out. Bail them out with $700bn we don't have. The proposal seems to be for the government to go buy up bad debt. For those listening at home, I believe this means the government is now making one of those risky investments that got here in the first place with your money... even expressing as they do that they don't think they'll get it all back. Oh yeah, this also frees up those companies that got us here in the first place to go find more risky investments to make to recoup some of their losses.

Analysis - private companies enabled by a government company made risky investments with individual private consumers that failed. Now everyone will foot the bill with more money the country will have to borrow from abroad (will Asia want to take on this risky investment?). The lawmakers hashing out the plan are being urged to make a decision yesterday, and some of the interests getting reported are the need to protect the homeownership of the very individuals who have defaulted on their loans to get us here in the first place.

Ahh... that's right. We're fine saying the companies should get hammered, bought out, cut to pieces, and their CEOs' salaries capped and/or the CEOs put in jail. But we want to protect the consumers who made the unwise purchasing decisions that got us here in the first place. Backing those innocent consumers seems like a great way for a man to get votes next election.

Accountability. It comes back up right here. Why not let those private individuals who made risky investments deal with their own collapse? A private venture existing to make a profit shouldn't get bailed out with tax dollars because they lost their gambles. Why not let those homeowners who got into awful debt lose their homes? They can find living spaces that match their needs and cut spending as well. I live among men who get by on a few hundred dollars a month and they're thankful for the roof over their heads. The government? Why... they should just get out of the way and let the system collapse and rebound.

But won't that be bad for everyone? In the reasoning of the President, won't that cost the American people more in the long run than a $700bn bad loan up front? Well... we just don't know. I haven't read reports with research to back up that claim, and I'd be interested to know how it would work out. Certainly interested enough that I'd vote for Ron Paul if he was on my ballot come November. Eye-wink

I guess accountability for the government would be a report outlining what would happen if we were to pass on this whole loan idea. Actual numbers and statistics. Then we could compare that against what really happens if the loan flops. We could verify the results and say, ahh, yeah, the administration had it correct. Or, we could compare it against what happens if the loan passes and see if the loan actually avoids the foretold catastrophe. If not, you can hold the administration accountable for the waste.

I watched a couple funny videos from Jon Stewart that I'll link to with his take on the situation and the government's reaction. John McCain is taking a nice beating for "halting his campaign", which is interesting since, as David Letterman pointed out, he shouldn't need to halt his campaign to go to Washington since his campaign partner isn't a Senator. Anyways, here are the videos. I'm not in total agreement with Jon Stewart, but I had a good laugh nonetheless...

Feel free to inform my thoughts... like I said, I'm not even a minor in this field, so I'm interested in some more experienced commentary.
#1Submitted by James Thompson (not verified) on Mon, 09/29/2008 - 08:57.

Yeah, the government

Yeah, the government stepping in with such a big plan while already operating in deficit spending seems ludicrous. Where is the money even going to come from. A voice on the radio today asserted that the bailout not cost the tax payers anything, certainly if we borrow the money or just print it there won't be an upfront cost, but we're gonna pay for this somehow. What's really crazy is that Dennis Kucinich, a.k.a. Lefty Leprechaun, is starting to sound like a fiscal conservative, at least until you get to his solution:

"[T]he American people are about to pay the price of the collapse of the $513 trillion Ponzi scheme of derivatives. Yes, that’s half a quadrillion dollars. Our first trillion dollar compression bandage will hardly stem the hemorrhaging of an unsustainable Ponzi scheme built on debt "de-leverages."

Does anyone seriously think that our public and private debts of some $45 trillion will be paid? That the administration's growth of the federal debt from $5.6 trillion to $9.8 trillion while borrowing another trillion dollars from Social Security has nothing to do with this? ...

This is a debt crisis, not a credit crisis."

(http://kucinich.us/index.php?option=com_content&task=view&id=2442&Itemid=1)

The central problem is that our whole economic system is built on debt, not wealth, the ability to borrow instead of save money. It is way too easy to get credit when you don't need or deserve it. Fundamentally our financial system needs some serious shaking up and readjustment. I personally think a hard economic crash could be could good as a mechanism for resetting economic priorities and breaking the current stranglehold held by both of the major parties on our political processes. Remember, that some of the things that got us in to the mess are the direct result of government interference and abuse of the financial systems, our money doesn't even have real value anymore, only the value our "economy" can sustain thanks to government and marketplace manipulation.

#2Submitted by Emanuel (not verified) on Thu, 10/02/2008 - 09:24.

Well it's easy to blame to

Well it's easy to blame to customer but consider a few things also.
Just a few years ago the real estate market was booming. Houses were extremely over priced in many areas - this is not the consumer's fault (this was "the market").
Mortage brokerage firms were popping up all over to "help" people with not so great credit get houses. I think the blame here should go to the bank and the mortgage brokers/loan officers who were not completely upfront with customers. The loan officer was delighted to sell a $300,000 - $400,000 loan (and upwards), the bank was very happy with the potential return because of high interest rates due to poor credit of the customer, and worse case, they would default and the price of the house would increase so they would still make a profit by selling a more expensive house they'd own due to foreclosure, and all the consumer was happy about what that it seemed they could finally afford to put their family in a house whose value was expected to increase (as a family man yourself, I'm sure you could understand or appreciate how great a feeling that would be to someone who couldn't do it before). The consumer wasn't told (any maybe didn't think to ask, or if he did loan officers probably lied) that the monthly payments might increase and the value of the house might go down (they probably thought themselves that they could even cash in by selling their houses for more in a few years - I'm sure this was pitched to them).

Then what happened was the demand went down and with a surplus in supply, the prices started to go down. Now homeowners were left with a mortage after a year or even more of payments that was still significantly less than the new cost of the house - so they can't sell it. Then the monthly payment increase that was maybe in the fine print and brushed over by the loan officer (they probably said something to the effect of "don't worry about that") kicks in and it no longer makes any sense to these people to keep their home or they can no longer afford it.

Now the banks that thought that they could make a profit by re-selling foreclosed homes also can't, even at greatly discounted prices. So they are left with property whose value continues to decline - millions of them, that they paid for in full already.

#3Submitted by Ryan on Thu, 10/02/2008 - 12:12.

Thanks for the helpful

Thanks for the helpful overview, Emanuel. Don't think I've really seen it laid out like that before. Smiling

I certainly can't fault consumers for being suckered into something by a less-than-forthcoming loan officer, I just wish someone somewhere would have taught them it's a bad idea to let your lender arbitrarily increase the interest rate on your loan. Sticking out tongue It seems like common sense would prevail, but alas it's apparent it did not.