present economic crisis
TRANSCRIPT
What interests me about history II
The current US Economic Downturn, Terry Onley, Hist 140 “Some economists - those of the Austrian school and those predicting the recession such as Steve Keen -
claim that the ultimate point of origin of the great financial crisis of 2007–2010 can be traced back to an
extremely indebted US economy. The collapse of the real estate market in 2006 was the close point of
origin of the crisis. The failure rates of subprime mortgages were the first symptom of a credit boom
tuned to bust and of a real estate shock. But large default rates on subprime mortgages cannot account
for the severity of the crisis. Rather, low-quality mortgages acted as an accelerant to the fire that spread
through the entire financial system. The latter had become fragile as a result of several factors that are
unique to this crisis: the transfer of assets from the balance sheets of banks to the markets, the creation
of complex and opaque assets, the failure of ratings agencies to properly assess the risk of such assets,
and the application of fair value accounting. To these novel factors, one must add the now standard
failure of regulators and supervisors in spotting and correcting the emerging weaknesses.”
Wikipedia, ”Late 2000s Recession” Fratianni, M. and Marchionne, F. 2009. The Role of Banks in the Subprime
Financial Crisis available on SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1383473
One has to wonder why we didn’t see it coming. I think the quote above covers a good part of the
reasons for our current recession (depression?), but perhaps without emphasizing the underlying,
insane greed on the part of the CEOs and pretty much everyone else in the financial business.
There is a fine tradition in any civilized society for the few wealthy to become wealthier on the backs of
the many workers in the society.
In America, we had become used
to the presence of a “Middle
Class”, a sure sign of the
diversion of wealth from its
intended course to the pockets
of the ultra-affluent to those less
worthy. It looks to me as though
the efforts of the financiers and
large corporate entities to bleed
profit from the economy were
overdone recently, and the
situation spiraled out of control.
Since the regulators came from the same industry that they were regulating, they didn’t really do much
regulation, so the financial industry pretty much had a free hand, everyone making risky deals at will,
using deceptive practices and language to obfuscate the unfeasible nature of their activities.
“Subprime Mortgages”? Hmmm, so you lend folks money on a home, sell them a mortgage that slides
into a variable rate, and then jack up the prime rate! They weren’t subprime until then, were they?
What interests me about history II
The current US Economic Downturn, Terry Onley, Hist 140
Say, let’s make it so that the
price of real estate goes up
every year, so we can make
money on what we bought last
year without actually doing
anything! What a great idea,
money for nothing! Then, we
can borrow money on the
equity, and get a lot of really
great stuff. Maybe more real
estate! Why, wouldn’t it be
great if we could just do that
forever…
Unemployment (and underemployment) rates are still at all time highs in many areas of our country,
except of course in the areas surrounding Washington D.C. More government is better, right? Right!
Of course, it’s not just the US. The rest of the world is having a pretty similar experience, better in some
areas, worse in others. Same reason, things just got out of control.
On the TV the other day, I heard a Chinese government spokesman talking to CNN about the inflation in
his country. Loosely quoted, he said “If the workers want pay raises, they are going to have to expect
inflation.”! Can’t have those rich industrialist stinted a few yen, can we?
I suspect that we are entering an era where the greater portion of the US population is going to be more
cautious about spending their money, and having to get used to a kind of cheaper, crummier life than
they thought they were going to have 10 years or
so ago.
After all, to the financially elite top 1% of so of
this nation’s population, all the rest of us are just
peasants.
Sometimes it’s hard to remember that; other
times, it’s quite a bit easier…