Root of Financial Meltdown - Misguided Compassion
What a mess - the 2nd biggest financial meltdown ever! It is as if the accelerator in Switzerland started a black hole after all, and most of the globe was getting sucked into it. How did it begin?
It started with very good intentions. About 30 years ago in the most powerful economy in the world - the U.S - it started as a way to fight racism, and then poverty too.
Some banks would not lend for mortgages in very poor areas. This was called "red-lining." These areas had such poor credit ratings and high default rates on mortgages that banks had to avoid them. But many such areas were not only poor, but also largely African-American or Hispanic. So it also could have been racial discrimination. So activists attacked red-lining as disguised but real racial discrimination.
In many ways, they were right. There was racial discrimination and prejudice then on a much larger scale than now. There was a great need to end it. So it was a good cause, and compassionate people got on board to end red-lining.
The problem started when the government got involved, with good intentions and its power to enforce. Soon banks were forced to make housing loans in red-lined areas. Then a "quota" system evolved. Banks had to show that they had an "adequate" number of loans in red-lined areas.
Politics being what it is, the new government agencies began to grow enormously. In election after election, more goodies were promised to be added onto the mission of these agencies. More people were to be included. Then more next time. Then more the next election. Politicians also began to use these agencies to hire their favorites.
Meanwhile the banks, making more and more bad loans, needed help. So credit to banks was made easier to get. and apparently guaranteed by new government agencies. These new agencies grew so much that after awhile, almost every housing loan in the country was backed by them. The guaranty might not have been clearly spelled out, but it was believed that the "faith and credit" of the entire U.S. government stood behind these loans.
Interest rates were also made low, so that "everybody could be a home-owner."
The business community took advantage. So did most U.S. families. As usual, when investments seem low-risk, people risk more on them. Real estate, both residential and commercial, became more of a low-risk investment.
When interest rates were kept low, people borrowed more. They borrowed more than they needed for mortgages and got consumer loans too. They got bigger, more expensive houses than they would if they paid higher interest. They bought more cars, TVs, furniture, vacations and everything else. Since borrowing was so cheap and easy, they even saved less. This made a bubble. And bubbles always burst.
But that's only part. Since borrowing was so low-risk, business began to take higher and higher risks - especially in the financial sector. There, leveraging began to rule, at ever-growing rates. A huge boom was built on it.
Leveraging is necessary. The economy could not function without it. But financial institutions and investors began to develop new kinds of leveraging instruments, not only options and trading on margin, but newer kinds of derivatives, based on even more "borrowing." Fortunes were built, all over the world. Not only individuals, not only financial institutions benefited from them, but also pension funds, colleges, charities, and the 40% or so of Americans who invest. The fact is, we all benefited, one way or another.
Most of all, political parties and politicians benefited from them. But that is another story.
Sadly, it was a bubble. That was because, with the piled-on leveraging instruments, you could eventually buy $100 or sometimes $1000 of financial paper instruments with only $1 of actual investment. Apparent guarantees of almost any mortgage, plus very low interest rates, eventually made such "investing" inevitable. And we have known for a long time that such activity must cause a bubble. That booms built on such unwarranted risk-taking must collapse. If they are big enough, they can take out a whole economy. If such booms are international enough - as they are more and more - they can take out every economy in the world.
All from unwise, misguided and politically-abused good intentions in one country.
What about next time? Deal with it. Boom/bust is part of the capitalist system. Capitalism is, after all, a terrible system. But everything else is worse! Any kind of tampering with it makes it move toward socialism, facism or mercantilism. Mercantilism - trying to change the free market-decisions of capitalism to favor any producer or group or consumer - is the danger for democracies. It is what we are struggling against in the U.S.
_
There is a fine line between mercantilism and needed regulation. The bursting of bubbles may require new regulation, but that should be temporary. The ordinary regulation needed for capitalism to work is to enforce contracts, protect property, penalize fraud and punish infractions. Good militaries, courts and police are needed to prevent looting, theft, intimidation and violence. Beyond that border, mercantilism begins and the benefits of capitalist begin to be lost.
But where does our compassion come in? Is the brutal working out of competition to rule instead? Absolutely not! Capitalism may be the biggest part of having true compassion, since does more for the poor and afflicted than any other system. But the government is a poor, deceptive, counter-productive way to help them, eventually causing the problem to become even worse.
Charities work better. We all can inform ourselves, give and volunteer. If we had tackled "red-lining" through charities 30 years ago instead of using the government, it would have worked better in the net.
Look what would not have happened. Our government and country would not have spent so enormously more than it should have. We would not have tempted so many politicians and so distorted our politics and government institutions. We would not have caused thie huge bubble. It would not have burst, with all the loss that will bring. And we would not have caused all this harm to the very people we were trying to help, who were likely among the first to lose their houses.
Whatever we would have achieved by charity would have been a net benefit to those we wanted so much to help. It would not have caused such great harm and loss as using the government. Long run, charities would have done more true good and less harm. Governments cannot do that in compassionate matters..
________________________________________
Also see these sources:
Excellent - includes demographic and international issues. Lehman and the End of the Era of Leverage by Spengler, at http://www.atimes.com/atimes/Global_Economy/JI16Dj08.html and also http://www.atimes.com/atimes/Global_Economy/JG01Dj07.html
Excellent - Ticking Time Bomb Explodes: Public is Shocked, at http://www.independent.org/blog/?p=186
Whose Bailout Is It? at http://www.investors.com/editorial/editorialcontent.asp?secid=1501&status=article&id=306545173352598
The Real Culprits In This Meltdown, at http://www.ibdeditorials.com/IBDArticles.aspx?id=306370789279709
Mud-Flap Manor, at http://www.nypost.com/seven/09152008/news/nationalnews/mudd_flap_manor_129159.htm
About the best ways to help the poor, see Up and Out: A Guide to True Compassion for the Poor" at www.upandout.us.
It started with very good intentions. About 30 years ago in the most powerful economy in the world - the U.S - it started as a way to fight racism, and then poverty too.
Some banks would not lend for mortgages in very poor areas. This was called "red-lining." These areas had such poor credit ratings and high default rates on mortgages that banks had to avoid them. But many such areas were not only poor, but also largely African-American or Hispanic. So it also could have been racial discrimination. So activists attacked red-lining as disguised but real racial discrimination.
In many ways, they were right. There was racial discrimination and prejudice then on a much larger scale than now. There was a great need to end it. So it was a good cause, and compassionate people got on board to end red-lining.
The problem started when the government got involved, with good intentions and its power to enforce. Soon banks were forced to make housing loans in red-lined areas. Then a "quota" system evolved. Banks had to show that they had an "adequate" number of loans in red-lined areas.
Politics being what it is, the new government agencies began to grow enormously. In election after election, more goodies were promised to be added onto the mission of these agencies. More people were to be included. Then more next time. Then more the next election. Politicians also began to use these agencies to hire their favorites.
Meanwhile the banks, making more and more bad loans, needed help. So credit to banks was made easier to get. and apparently guaranteed by new government agencies. These new agencies grew so much that after awhile, almost every housing loan in the country was backed by them. The guaranty might not have been clearly spelled out, but it was believed that the "faith and credit" of the entire U.S. government stood behind these loans.
Interest rates were also made low, so that "everybody could be a home-owner."
The business community took advantage. So did most U.S. families. As usual, when investments seem low-risk, people risk more on them. Real estate, both residential and commercial, became more of a low-risk investment.
When interest rates were kept low, people borrowed more. They borrowed more than they needed for mortgages and got consumer loans too. They got bigger, more expensive houses than they would if they paid higher interest. They bought more cars, TVs, furniture, vacations and everything else. Since borrowing was so cheap and easy, they even saved less. This made a bubble. And bubbles always burst.
But that's only part. Since borrowing was so low-risk, business began to take higher and higher risks - especially in the financial sector. There, leveraging began to rule, at ever-growing rates. A huge boom was built on it.
Leveraging is necessary. The economy could not function without it. But financial institutions and investors began to develop new kinds of leveraging instruments, not only options and trading on margin, but newer kinds of derivatives, based on even more "borrowing." Fortunes were built, all over the world. Not only individuals, not only financial institutions benefited from them, but also pension funds, colleges, charities, and the 40% or so of Americans who invest. The fact is, we all benefited, one way or another.
Most of all, political parties and politicians benefited from them. But that is another story.
Sadly, it was a bubble. That was because, with the piled-on leveraging instruments, you could eventually buy $100 or sometimes $1000 of financial paper instruments with only $1 of actual investment. Apparent guarantees of almost any mortgage, plus very low interest rates, eventually made such "investing" inevitable. And we have known for a long time that such activity must cause a bubble. That booms built on such unwarranted risk-taking must collapse. If they are big enough, they can take out a whole economy. If such booms are international enough - as they are more and more - they can take out every economy in the world.
All from unwise, misguided and politically-abused good intentions in one country.
What about next time? Deal with it. Boom/bust is part of the capitalist system. Capitalism is, after all, a terrible system. But everything else is worse! Any kind of tampering with it makes it move toward socialism, facism or mercantilism. Mercantilism - trying to change the free market-decisions of capitalism to favor any producer or group or consumer - is the danger for democracies. It is what we are struggling against in the U.S.
_
There is a fine line between mercantilism and needed regulation. The bursting of bubbles may require new regulation, but that should be temporary. The ordinary regulation needed for capitalism to work is to enforce contracts, protect property, penalize fraud and punish infractions. Good militaries, courts and police are needed to prevent looting, theft, intimidation and violence. Beyond that border, mercantilism begins and the benefits of capitalist begin to be lost.
But where does our compassion come in? Is the brutal working out of competition to rule instead? Absolutely not! Capitalism may be the biggest part of having true compassion, since does more for the poor and afflicted than any other system. But the government is a poor, deceptive, counter-productive way to help them, eventually causing the problem to become even worse.
Charities work better. We all can inform ourselves, give and volunteer. If we had tackled "red-lining" through charities 30 years ago instead of using the government, it would have worked better in the net.
Look what would not have happened. Our government and country would not have spent so enormously more than it should have. We would not have tempted so many politicians and so distorted our politics and government institutions. We would not have caused thie huge bubble. It would not have burst, with all the loss that will bring. And we would not have caused all this harm to the very people we were trying to help, who were likely among the first to lose their houses.
Whatever we would have achieved by charity would have been a net benefit to those we wanted so much to help. It would not have caused such great harm and loss as using the government. Long run, charities would have done more true good and less harm. Governments cannot do that in compassionate matters..
________________________________________
Also see these sources:
Excellent - includes demographic and international issues. Lehman and the End of the Era of Leverage by Spengler, at http://www.atimes.com/atimes/Global_Economy/JI16Dj08.html and also http://www.atimes.com/atimes/Global_Economy/JG01Dj07.html
Excellent - Ticking Time Bomb Explodes: Public is Shocked, at http://www.independent.org/blog/?p=186
Whose Bailout Is It? at http://www.investors.com/editorial/editorialcontent.asp?secid=1501&status=article&id=306545173352598
The Real Culprits In This Meltdown, at http://www.ibdeditorials.com/IBDArticles.aspx?id=306370789279709
Mud-Flap Manor, at http://www.nypost.com/seven/09152008/news/nationalnews/mudd_flap_manor_129159.htm
About the best ways to help the poor, see Up and Out: A Guide to True Compassion for the Poor" at www.upandout.us.
posted by Old Neocon at 2:38 PM
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