"I'm melting, I'm melting!"
Unfortunately, I'm not referring to the Wicked Witch of the West here. I'm talking about Wall Street. These dying words of the Oz antagonist seem to so succinctly sum up the mood that is pervading the world economy anymore.
I'm not an economist, and I can't claim to have any expertise on these matters. But, if all the so-called "experts" apparently can't avoid a massive financial crisis, who says this blogger can't throw his two cents in?
Let's back up and try to see exactly what has been happening here. It all started about a year and a half ago, when banks began offering customers subprime mortgages. A subprime mortgage is basically a mortgage (a loan to buy a house) that is marketed towards customers who really shouldn't be taking out mortgages. In other words, these customers have bad credit ratings, and there is a high possibility that they will not be able to make their monthly loan payments. Well, that's exactly what happened. People found that they couldn't afford to pay off their mortgages, and the banks foreclosed their homes. Believe it or not, banks lose money when a mortgage is foreclosed, because they are receiving an item (that is, a house) minus the tens of thousands of dollars they had expected to make off of interest on the loan.
In the highly interconnected and interdependent global market in which we live, the sudden surge of foreclosures, and billions lost by banks issuing the mortgages, caused a ripple effect, touching the entire financial world and even many areas outside of it. Actually, forget ripple effect. This can only be described as the tsunami effect.
One of the earliest banks to find itself in very, very, boiling hot water in this crisis was Bear Stearns. Its customers began to lose confidence in the bank. It may seem strange, but in banking, confidence is extremely important. After all, a bank deals in invisible, intangible loans and depends on people's moods about buying and selling. Bear Stearns couldn't make ends meet, so our wonderful United States government decided to force Bear Stearns to sell itself to another financial institution- JP Morgan- to avert certain doom. It was, for all intents and purposes, a shotgun wedding between two banks. By the way, the government provided JP Morgan with the money to buy Bear Stearns with. That's right- tax money, our money.
Now we make a bit of a chronological leap, and move up to early last week, as the chief mortgage lenders in the country- two entities so adorably nicknamed Freddie Mac and Fannie Mae- found themselves in a lot of trouble. I could go back decades, to the congressionally sponsored founding of the two companies, but that would be excruciatingly boring for an already dry subject. So go research that on your own. Now, Fannie and Freddie guarantee 80% of the mortgages in the United States. Obviously, they cannot be allowed to fall. So the United States government (more specifically, the Federal Reserve, who is the main agent of the US in all of these matters) once again so fortuitously decides to move in and take over the companies. And again, tax payers' dollars will fund the project.
Next to falter? Financial institution and Wall Street icon, Lehman Brothers. Their shares on the stock market have dropped precipitously in recent times- an astounding 92%. Sensing the mortal danger they were in, the company looked for a buyer. No one was willing- or brave enough- to take Lehman Brothers up on the offer. Pleas to the Feds went ignored as well. The company was left to die, and is filing for bankruptcy.
Simultaneously occurring with the fall of Lehman Brothers, the retail brokering giant Merrill Lynch- I'm sure we're all familiar with their bull logo and frequent TV commercials- came crashing down. Unlike Lehman, they were able to find someone to save them by buying them out: Bank of America. This deal will make Bank of America the largest financial institution in the world. Take note of that- I'll have many a grievance about this later.
Now, the latest development, occurring as I type, which finally got me fed up enough to prompt a blog on this ongoing catastrophe: AIG, the insurance behemoth, is on the verge of collapse. And yet again, the Federal Reserve is on its way. The government is offering the company an $85 billion loan to shore it up, in exchange for an 80% stake in the company's stock. In other words, the US government now owns 80% of a private company. This time, the Feds claim that the loan, while initially covered by tax payers' dollars, will be funded by the company itself as it sells off its assets.
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Wow. For those of you who stuck with this saga, thanks. It is certainly not a fun topic to research, write about, and certainly read. But it is immensely important to all of us- especially those of us who complain about the economy. With an upcoming election, we should know what's going on in the economy so we have some inkling as to how to fix it, and elect the right man for the job.
So, on to my own reflections. I don't own any stock, I don't have to pay a mortgage, and I don't have much saved in a bank account. And yet, I can still see the gravity of the situation here. For instance, Lehman Brothers and Merrill Lynch have been in existence for around 200 and 100 years, respectively. So, both survived the Great Depression, and yet the current financial crisis has killed them. If that doesn't scream "EMERGENCY," nothing does.
First off, our government plays a significant role in rescuing these companies, and that requires a lot of money. And that money comes from the American people. How is it legal to keep an immensely rich company afloat by using the little people's money? How is it even ethical, for that matter? Our president is a Republican, I'm told, and Republicans are supposed to be the financially thrifty ones. These actions are totally out of line with conservative fiscal ideology.
Additionally, part of the mindset on Wall Street that causes bankers and accountants to take such huge risks (Remember the subprime mortgages? Those huge risks.) is that the government will save them if anything goes wrong. Unfortunately, the government has done exactly that in most of the above instances, and this will only perpetuate the idea that bankers can take huge risks, because good ol' Uncle Sam will back them up. The US claimed it was trying to send a message to Wall Street that it would not encourage "risky behavior" by not buying Lehman Brothers. Why, then, did it buy or help out everyone else? Regardless of what our government is saying, their actions are thundering the total opposite!
So, let's look into the mind of one of those greedy little Wall Street bankers. We are a capitalist society, nothing wrong with that. A capitalist society is based upon money. Still, there's nothing too bad about that. Money ferments greed, and greed is an unstoppable, destructive force. That's definitely a huge detriment.
The reason these bankers took such big risks with the subprime mortgages, regardless of the consequences, was principally because they wanted to make more money- they were greedy. There is something unsettling, but totally unsurprising, that this basic and ancient human vice is contributing to a massive breakdown. I've always believed that human beings are inherently imperfect (not evil, just imperfect), and therefore any institution we create, be it government, education, or economy, will also be hopelessly flawed. The current financial crisis provides an excellent example.
Who else is to blame besides the greedy bankers? Well, whether you like it or not, those millions of Americans who insisted upon taking out a mortgage must shoulder some of the responsibility for the crisis. In a way, they too were greedy, because they tried to live outside of their means. There is nothing wrong with wanting your own house, but one must be patient and thrifty when buying one. If you can't afford the "house of your dreams," sorry, you can't have it. A lot of people seem to be afraid to point the finger of blame at these Americans because they are now traumatized by the crisis, and we don't want to compound their misery. But, their irresponsibility is indeed partially to blame.
As a conservative, I believe in decentralization. It provides stability. However, our financial institutions are anything but. Take Freddie and Fannie, for example. They are responsible for 80% of this country's mortgages. Or Bank of America- by taking over Merrill Lynch, they've become the largest financial corporation in the known universe (drama intended). The problem with these massive, centralized companies is that when they fail, they create a huge whirlpool which pulls down the millions of customers and billions of dollars associated with them, and the problem spirals out of control. In the case of a small business failing, the negative effects are not as widespread or severe, and therefore recovery is much easier.
Lastly, we need more governmental oversight of these big corporations. I do not mean governmental regulation or ownership (that would be socialism, which is the path we seem to be on, anyway). Wall Street needs to be more transparent, so the government and the people can see potential problems, and fix them before they magnify and spread, like some cancerous blob.
So, to conclude this extremely long blog post, here is my final word: our financial crisis was caused by a combination of corporate greed, consumer irresponsibility, centralization of banks, and lack of government oversight.
Now, how should we fix the current crisis and ensure it never happens again? I'll leave that to the "experts" who got us into this mess. Then again, I don't know who to trust to pull us up and out.
