Economic Crisis Analysed by an Ignorant Buffoon.

I have never taken a class in economics. I have never studied economics on my own. I have no public qualifications in economics, finance, banking or punditry. Clearly, I am completely unqualified to comment on the present financial "Crisis". However, my wife and my debt is in a low, fixed rate mortgage that probably amounts to about one third the amount of our assets, we are saving money and everything we have is insured. This is not a financial crisis for us, and the reason is that we appear to have made extremely sensible, responsible decisions that have resulted with us perhaps being poorer than an expert might have been, but also has meant that we have been free of risk. If you compare that to the experts on Wall Street, maybe I am qualified to comment after all.

There's lots of talk about what caused the crisis. It seems pretty simple to me, those who took the initial risks were, on the side of consumers, stupid and ignorant in that they took out loans that they could only afford when things went well. On the side of lenders, the original lenders were unconnected to the consequences of the risk (they sold on the mortgages to big banks), and the purchasers of these bad loans were relying on a stable economy (foreclosures and defaulters to be spread out evenly) and large scale to enable them to have enough money to keep up their monthly commitments. What happened was that there was an increase in the rate of defaulters and foreclosures (most often because there is no complete health care) and at the same time house prices shrank. So temporarily these loans were not worth much money, they had been gathered together in vast institutions rather than small institutions and so the failures were to major insttutions rather than small, badly-run institutions. So, over the next twenty years the owner of these mortgages are going to make money, it's just that this year these loans are not-sellable, and therefore almost worthless.

What should have happened is that there should have been universal health care to avoid 60% of the foreclosures. What should have happened is that mortgages should have remained with the lenders so that the risk of risky mortgages is shared between borrower AND lender (I think if you sell mortgages, they way you should make money is from the return from those mortgages, if you don't have the capitol to do ths, you don't have enough capitol to sell mortgages). This meant that even unscrupulous people selling mortgages would be less inclined to sell bad mortgages. What should have happened is that some basic education on how to manage money should be part of the basic education in the United States. It should be a simple, basic part of understanding of buying a house that you need to be able to make your payments ALWAYS, and that things go wrong!

But what should have happened isn't really the question at the moment. The question right now is whether there should be a massive bailout of huge companies that made dumb decisions. Regulation MUST follow (but it always does), but right now the question is whether a substantial portion of the financial sector that has failed should be allowed to receive the results of that failure. The knee-jerk reaction (and therefore the one held by the american public) is "Yes! Screw those guys, they're the ones who failed through greed and who wouldn't blink an eyelid if I lost everything I own." This is why today the vote in Congress failed. The standard Washington reaction is "Of course we need a bailout, we can't be the guys who let a depression happen." The problem seems to be that without the bailout there simply won't be enough capital to lend companies the money they need to grow. You might have a restaurant that is doing well, and a whole plan for a new location that would create wealth, jobs, revitalize a neighborhood etc.. That restaurant might have an almost fullproof plan to make money, but doesn't have the capital to start up the new restaurant, so the credit crunch slows the entire economy, people lose jobs, pay less taxes, spend less money, etc.. Other companies might need a short term loan to fix equipment, update equipment, compete in the global marketplace. So, it might be that $700 billion injected into the economy by the government might generate $700 billion or more as a result. It's also quite possible that the purchase of these junk mortgages might pay for itself as if their value increases over time, and the USA is willing to sell them in the manner of a private institution for profit, more money might actually come back to the government (it has happened before). So the bailout might well work out for the economy if done correctly.

But what this comes down to is that it will work if done by sober, capable professionals with a high moral code and without anything in it for themselves. But we know that rich people steal more than poor people. We know that generally when decisions are made in high finance and government that the rich get richer and the poor get screwed. When the rich commit crimes to get richer they receive less punishment than the poor committing crimes to be able to eat or get shelter. This is essentially a trust decision, if there was someone we could trust to do the best for working people and not for the financiers, then we would support that guy. But we don't trust anyone. The culture wars of the nineties are being replaced by the class wars in the USA, and I, for one, am quite pleased. The future is in Europe, with a free-market as the engine, but with the government as a regulator on that engine so it meets the needs of the driver of the car rather than simply producing the most amount of power it can. The future is in a society that measures things in terms of health and happiness rather than dollars. A free-market produces the most amount of wealth because of the greed inherent in humans. But a government provides for the needs of citizens far better than a free market because it cares about all the citizens.

This is a time in which the essential nature of the culture of the USA will change. The twentieth century was the century that fought about which was the better system, communism or capitalism. The answer has been found to be something of both, in the right amounts. Communism died first, but pure, free-market capitalism is not far behind it. Just like a sensible home-owner tries to make money but ensures that they will always have access to health-care and has enough in savings to get through a crisis, a sensible government makes sure its citizens have shelter, health-care, education and some protection from the extremes of a free market. But what do I know? I'm just an ignorant buffoon.