The Financial Situation – Jared
September 29, 2008 2 Comments
The first in a series dedicated to ever changing economy of the United States, her current crisis and beyond.
So this economic crisis has been in the news constantly for the last two weeks and unfortunately neither Tilly or I have had the chance to talk about it at all. Fortunately for you I have been working on a series on the economy that was going to be 4 parts, but will end up extending on indefinitely as my economic series.
First I want to lay down a little history on the economic system, then give you someone’s creative youtube video laying out basically what I’m going to say.
Essentially this started in 1995 with the Community Reinvestment Act revamp by Congress. While I don’t understand all the details this lead to mortgage lenders passing off bad mortgages to companies like Merrill Lynch, AIG, etc. What happened was a “housing bubble”, something I’ve been hearing about in California for years. House prices there are huge due to supply and demand but since the mid 90’s things have been getting out of control. I’ve heard talk for a couple of years of how everyone is just waiting for the bubble out there to burst and hoping at the same time it didn’t come.
Unfortunately it has and it lead directly to the crisis we have now. Lenders with borrowers in foreclosure is not a recipe for a safe financial market. It scares off foreign and domestic investment which is crucial to our world economy. I know I just mentioned foreign investment but we have to keep in mind that we live in a truly global economy now. Any true economic enterprise is no longer just a domestic affair.
So why was this such a problem? Congress has been pressing for increased home ownership for the last twenty years, since Jimmy Carter passed the first iteration of the Community Reinvestment Act which was not overtly harmful to the economy in and of itself.
This crisis is a story of Congressional involvement in the economy which beyond the needed regulation is absolutely unnecessary and harmful and not just the financial’s fault. When Congress or any other government entity attempt to change the economy it inevitably leads to a disruption of the economic system.
What Congress has to learn and what it will always fail to learn is that the market does not need Congress to operate. The market operates 24/7/365, it operates automatically, and it operates peacefully without a single Congressman worrying about it. Why should the economy suddenly need Congress to oversee it? That is exactly what CRA did and as much as Barney Franks and Chris Dodd will deny it the Congress, not the corporations, are at the heart of the problem. The Democrats have come out aggressively saying they are not to blame, but strange that a Carter-era policy that Clinton upgraded should be at the root of this problem.
So why is this happening? Creative destruction was impeded by Congress. Capitalism’s way to clearing debris from the economic highway was interrupted by Congress, leading to a hinderance in the economic path and a very bumpy last couple of economic months.
And if you want to watch the video version of this (I found it after the article was started), then watch here.
Edit: Unfortunately the video I had posted up has been pulled off of youtube. The Warner Music Group pulled it off due to copyright violations. Hopefully it goes back up scat free and then I’ll repost it.