Wednesday, September 17, 2008

Chaos on Wall Street?

What is going on with the financial markets? Is it really bad? And how did we get here? And is it over?

I wish I knew - but the problem of a free market economy and capitalism is that these downward spirals happen and sometimes take a while to get out of. This is not the Great Depression - we don't have breadlines for the majority of the nation yet.

This article is one of the best that I have read while trying to sift through the various news media outlets to find out the truth about what is going on. It details why we are in the mess that we are in, and why this is not going to be over anytime soon unfortunately. And also why no politician is going to be able to fix this problem, despite their promises of "regulation" (because Sarbanes-Oxley works soooo well...riiightt). No, unfortunately, the way that this problem is going to be fixed is banks need to start giving out loans again (but only to those who are fiscally responsible - ie, buy and pay what they truly can afford!), commodity prices and inflation need to go down, the dollar needs to strengthen, and the drop in pricing for houses needs to bottom out.

And while we are blaming the housing industry/market, let's also throw some of that blame onto Alan Greenspan during his reign at the Fed that allowed these interest rates to increase inflation above the average American's wage, and make borrowing money (ie, "credit") easier than it should have been for that American. So those people buying the McMansions (that are now foreclosing in droves), 4 luxury cars, and sending their kids to private school were overextending themselves after all, and now can't pay their bills and thus are sending Wall Street into turmoil, because they can't pay back the amount of debt they owe and have to foreclose and the banks have to write down that debt. Coupled with the fact that someone decided it would be great to make some money off of the amount of debt that someone else owes, we find ourselves in a "credit crisis". Yeah, that was a brilliant idea - make money off of negative money - that'll work! Because eventually that money will be paid off right, and since it is accumulating interest, that lump sum will be worth even more? Turns out nope - they actually couldn't pay back the loan, because they never had the money in the first place - and YET someone approved them for a loan. And then it gets all technical with the types of loans given out - adjustable interest percentage rates mortgages or interest only loans, where none of the principal was being paid down, and the loan money kept going up and up - and Wall Street placed bets on that, never foreseeing that the assets that people were banking on (their homes) were NEVER WORTH THAT MUCH!

Now that the housing bubble has burst and continues to plunge, and continues to be exasperated by Wall Street's lack of foresight, we the consumer will continue to suffer, because the commodities that we need to go down (energy, inflation, agriculture) continue to the do the opposite - they go up, weakening our dollar and deflate the purchasing power of the average American because companies have to raise their prices in order to account for the cost of commodities going up.

It is making me nervous that the government continues to bail out these companies on Wall Street (at least some of my money is being used to save some people's jobs and livelihoods though), because the government has moved into uncharted waters in terms of involvement on Wall Street. I am not a fan of "big" government, but in this era of socialist democracy, I guess there is not a way to avoid it. But when I hear stories of how two government workers had to be hired in order to do another government worker's job because she was such a mess and yet was never fired - it brings a sick feeling to my stomach (and that is a true story).

And while people continue to buy IPods, Blackberries, and Rock Band 2, you can't say that we have reached Great Depression levels - sure, we are in a recession, but while people continue to buy "stuff" that is, in the end, non-essential to their existence, there is still some faith to be had in our economy. And there doesn't seem to be a shortage of work (just go to, or just yet, so again, there are reasons to remain confident and not hide in the bunker yet - or stuff all your cash under your mattress.

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