Lois & Clark Forums Forums General Discussion Off Topic Possible reason for Wall Street crisis

Like you said, Alcyone, the more one tries to look into the causes of the present economic woes, the more the roots of the financial crisis are found to be complex and intertwined.

So when Republicans try to pin all the blame for the Wall Street crisis on Fannie and Freddie, it reminds me a little of how George W. Bush put the blame for 9/11 on Iraq and Saddam Hussein. Admittedly there is an important difference, because Iraq and Saddam Hussein had nothing to do with 9/11, whereas Fannie and Freddie are certainly not blameless in the mess that created the Wall Street next-to-meltdown. But then as now, Republicans are missing the big picture. And spekaing of the big picture, Barry Ritholtz on the Big Picture has this to say about Fannie, Freddie, the RCA and the current crisis:

Barry Ritholtz goes on by saying this:

This is highly significant to me. Fannie, at least, had been around for seventy years when the credit market collapsed. There has been a recent development with a huge housing bubble expanding mightily for a couple of years, but the blame should be put on a seventy-year-old institution that worked pretty much blamelessly for at least half a century? Isn't it more likely that a venerable institution stumbled because the general economic and financial framework within which it acted had changed its rules?

Barry Ritholtz says:

A nonfeasant Fed. I assume that Barry Ritholtz is referring to the Administration in general and, perhaps, to the Chairman of the Federal Reserve, Alan Greenspan, in particular. The New York Times had a lot to say about how Alan Greenspan was determined to not rein in or regulate derivatives, which I believe is the term you use for "repackaging" loans, shaky or otherwise, and selling them to others as assets.

But as we have seen, many of those derivatives were nearly worthless, and when banking institutions which held such derivatives were asked to come up with real money, there was no real money in the derivatives to be found.

The New York Times describes how Alan Greenspan fought off several attempts to regulate derivatives trading and make sure that worthless papers weren't traded in the same way as secure ones. The reasons for Greenspan's defence of the derivatives are described by NYT like this:

Faith. Alan Greenspain had faith in the market. Inspired by Ayn Rand, he believed that collective power, as wielded by governments, was intrinsically evil, at least when it interfered with the free market. On the other hand, he absolutely believed that the individuals who acted on the free market were honorable and intrinsically good, because they were individuals.

Of course... you can ask yourself how Greenspan could have thought that Lehman Brothers or Bear Stearns or AIG or any of the other big actors on the financial market were individuals. As far as I can understand, this is another unfounded assumption made by the free market gurus. They believe that governments per definition are representatives of a collective power (and they certainly almost always are), whereas any private businesses of any sort should be defined as individuals, although they basically never are. (But even if they were, how would the fact that they are individuals guarantee that they are always honorable and not in need of any regulation?)

So if New York Times is correct, Alan Greenspan has been a believer in the unique goodness of the free market and the unique evilness of government interference, and he has used his unique influence to protect the free market from government regulations. To put it differently, Alan Greenspan's way of managing America's economy has been a faith-based initiative.

So what did he do, then, apart from fighting hard and successfully to protect the trade of derivatives from any regulation? The other thing he did was fuel the housing boom with ultra-low rates. The Ritholtz article has a very tell-tale graph, making it plain for all to see how uniquely low rates were between 2002 and 2005.

In my post which started this thread, I said that a very serious problem in the American economy is that the majority of American families have become poorer during the Bush presidency. An incredibe redistribution of wealth has taken place from poor- and middle-income families to, particularly, very rich families.

But such a huge redistribution of wealth, which makes the majority of American families poorer, should have caused concern and calls for action a lot sooner. I think it can be argued that the ultra-low rates hid the declining prosperity of most Americans. Thanks to the extremely low rates, it became very cheap to buy a house. And once you had bought a house, the value of your property would just keep rising, thanks to the housing boom. During this period Americans could use their homes as ATM machines, taking out new mortgages on their houses when they needed more cash. Who needs a decent job which pays decent wages when you can milk your own home for money?

But when the bubble bursts, the majority of the Americans will come to realize that they are poorer, perhaps far poorer, than they would have guessed during the happy boom and bubble years.

Roger, you helpfully pointed out to me a couple of posts ago that I can't vote in the upcoming American election. That, I have to admit, is correct. But for all of that it is of great interest to me, too, who wins the November election.

Just today, a Swedish radio program pointed out that even though Sweden has had only three right-wing governments since the 1930s, all of these right-wing Swedish governments have run into economic crises and financially hard times. But what the radio program didn't say, but which I find significant, is that all these right-wing Swedish governments were elected after the Republican Party had won at least two American elections in a row. The first of these right-wing Swedish governments was voted into power in 1976, after Nixon and Ford had been Republican Presidents for eight years. The second Swedish right-wing government was elected in 1990, after Ronald Reagan and the elder Bush had been Republican Presidents for ten years. And the third right-wing Swedish government was elected in 2006, after the younger Bush had been re-elected.

American politics counts. It counts in Sweden, too. It affects the political scene in Sweden.

But because I am a left-wing person, I believe that right-wing politics is usually bad. I think it is morally bad, because I believe that it is morally wrong to make the rich richer and the poor poorer. (And, for the record, that is exactly what has happened in Sweden, too. The present right-wing government has been lowering taxes, and guess who has benefited from that? And the government has cut down on aid to poor people, and guess who gets a worse life because of that?)

But it so happens that I don't just believe that right-wing politics is morally wrong. I believe that most of the time it is financially unsound, too. I believe, therefore, that if you try to steer your economic system to the right, the economy as a whole is likely to suffer from that. And judging from the Swedish example, this could in fact be true. Every time we vote a right-wing government into office, our economy suffers.

Ann