I’m not an economist, and indeed my interest in the economy generally falls just above my interest in which “Hills” character is hooking up with which semi-celebrity. But this recent economic collapse has got me worried.
As I’m sure everyone is aware, the stock market fell 500 points today, the worst loss since the markets opened after 9/11. The reason for the fall is one that fascinates me because it takes place on such small scales but has enormous ramifications for the US and the rest of the word:
Step 1: Person wants to buy a house (or a car, or a boat, or whatever).
Step 2: Person can’t normally afford to buy the house they want to buy.
Step 3: Lending company offers them an awesome “adjustable rate” loan so that they can afford the house.
Step 4: Rates skyrocket, making payments impossible, and the house gets foreclosed.
This happened literally millions of times all across the US. It’s obviously bad for the homeowner because they lose their house (and the payments they already made), but, as we now see, when enough people cannot afford to pay back their loans, the lending company too runs out of money and goes bankrupt. In some cases, these lending companies were well aware that the homeowners could not afford their loans, and relied on the fact that they could get at least partial payment for the house, and then resell it on the market when the loan was defaulted. Other times, they gave uneducated homeowners great-sounding deals with rates that increased to absurdly impossible rates, up to 300% (interest, not increase!) in some cases. This is called predatory lending, and it went on for years all around the nation without anyone crying foul.
On a larger scale, these loans ended up seriously hurting the lending companies. Fannie Mae and Freddie Mac, two of the largest lending companies in the US, recently were bailed out by the federal government (and your taxpayer money) so they wouldn’t go bankrupt. But this isn’t a trend that could continue- we cannot keep paying for companies that screwed up, even if the economic consequences are dire. So when Lehman Brothers reached the edge, no one was there to keep it from destruction. The result is what Alan Greenspan declared “by far the worst economy I have ever seen.”
All of this could have been avoided with more regulation. Everyone is always terrified by government intervention, but it is cases like this that prove it is necessary. My general complaint with free market capitalism is that it overwhelmingly favors the rich- those who can afford to play the markets. But here, we can see that it didn’t even do that- everyone was screwed over by what John McCain called “Wall Street greed, irresponsibility, and corruption”. The problem is that Wall Street is SUPPOSED to be greedy. That’s the nature of profit-making. Wall Street has no need nor desire for a conscience. That is what government is FOR- looking out for those whom Wall Street will not. The government protects and serves the people. And in this case, as in many other cases, the government’s free market policies failed. And nothing in the policies of John McCain, a man who continues to insist that “the fundamentals of our economy are strong,” and whose top economic advisor insists that our problems are “just in our heads,” would change that.