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Present Economic Crisis... Present Economic Crisis... Document Transcript

  • “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<br />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.<br />2028825192405There 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.<br />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.<br />“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?<br />190503810Say, 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…<br />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!<br />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.<br />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?<br />3000375391160I 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.<br />After all, to the financially elite top 1% of so of this nation’s population, all the rest of us are just peasants.<br />Sometimes it’s hard to remember that; other times, it’s quite a bit easier…<br />