I knew that the housing bubble bursting was a trigger for the later financial market failures but I was a bit unsure as to how much of the financial market failure was due to other causes. Then I heard yesterday that most of the $700 billion in bad debt that must be rescued is in fact mortgage debt. WOW!
The fuse for this crisis was lit by the Clinton administration. (Ironically, it’s being blamed on Republican financial policies.) If we hadn’t gone crazy loaning mortgage money to people who could not afford to repay it, this whole mess could have been avoided.
On Sept 25th, I read: “Had the politicians of both parties not coerced and pressured banks, S&Ls, Fannie Mae and Freddie Mac to make all those sub-prime mortgages, then to tie this rotten paper to good paper, convert it into securities and sell to banks all over the world, there would have been no global financial crisis.” People smarter than me have linked the crisis to the housing debt. And the crisis in housing debt was created by … government — the very people who are now attempting to fix the mess with a massive bailout using tax dollars. (See the Sixth Law of Government, Second Corollary.)
This is a perfect example of the Sixth Law. Government tried to help but ended up hurting instead. Yes, individual recipients of government’s beneficence were helped, temporarily — until they lost their homes (corollary 1). The usual suspects (Wall Street, bankers) are being blamed (corollary 2) and The response to this government-created crisis is to get government more involved (corollary 3).
Unfortunately, a government bailout is the least harmful of the possible responses. Equally unfortunate is that this is being labeled a Wall Street bailout — as if we’re only going to be helping the Fat Cats. Sometimes we forget who owns all those corporations. That stock is in millions of portfolios owned by everything from insurance companies to pension plans and church building funds. Many a retirement nest egg is held in stocks.
We all have a vested interest in seeing the bailout work. The economic consequences would otherwise be disastrous. With luck, the bailout bill can be made to protect taxpayers and not reward bad managers. But a bailout bill of some sort is a necessity, if we don’t want a huge economic downturn.