The financial crisis
The financial crisis seems to have gone almost as fast as it came. Last week the Dow Jones fell 500 points and this week it recovered 400 points. The reasons for this are not hard to find.
The economic problems of the US have been gathering steam since the downfall of several large companies due to falsification of balance sheets and sheer criminality. Then came the subprime mortgage crisis, due to many Banks lending mortgages and loans without sufficient collateral (i.e. "subprime" or loans with greater than usual risk) over a period of many years. Starting in late 2006 about 100 lending insititutions failed or declared bankruptcy due to lack of liquid credit, causing many people to lose the mortgages on their houses. This number is now thought to have reached about 5 million! In September 2007, Northern Rock, the fifth largest provider of mortgages in the UK failed, and the crisis became global.
When quasi-public lenders such as "Fannie May" and "Freddie Mac" got into trouble the US Treasury bailed them out by guaranteeing their loans. But, when Lehman Brothers declared bankruptcy last week, the largest failure in US history, the US decided not to bail it out. Then came AIG, the largest private holder of mortgages in the US, and the Treasury was forced to step in to avoid disaster. Finally, the US Govt., represented by Secty. of the Treasury Henry Paulson, came out and declared that the US Govt. would in fact underwrite all bad ("toxic") debts of all major lending institutions, an unprecedented step, especially for a Republican Administration. As Pres. Bush later said, he is against Govt. intervention in the market, except where it is absolutely necessary!
There are now endless debates about who is responsible for this situation and which party/candidate has the best response. As to blame, there is plenty to go around. The Republican party and its previous Presidents, notably Pres. Reagan, was responsible for deregulating the stock market, that allowed some of the bad practices that lead to the current situation. However, the Democratic Congress was certainly responsible for the policies of extending loans to poor and working people who lacked the collateral to cover them, i.e. they were among the many sub-prime borrowers who caused the crisis. But, many financial leaders and institutions made a lot of money out of making these shaky loans, and now have retired from the scene, no doubt with their pockets lined with cash. So the crisis resulted both from the fat cats and the poor, from the Republicans and the Democrats.
In general, an economic crisis usually hurts the party of the incumbant. But, the situation today is so unique that it is difficult to predict what will happen. Pres. Bush is taking a Keynsian policy of underwriting the debts of the major lending institutions to the tune of b$700. This is unprecedented, and requires quick legislative action by the Houses of Congress. However, there is opposition to this step, first by right wing Republicans who resent the Govt. interfering in the market and second by liberal Democrats who regard it as a hand out of American tax dollars to those who have been getting rich and will now get away with it. But, the danger of not acting is too great, and both candidates and both parties have said they will support the legislation. The reaction of both candidates is being watched very carefully by the US public, who are the voters and account holders. How things now work out will determine to a large extent who gets elected in November.
Meanwhile, while the markets have responded very positively to the US bail-out, the systemic problems in the banking system remain to be resolved, and we are far from out of the woods yet.
The economic problems of the US have been gathering steam since the downfall of several large companies due to falsification of balance sheets and sheer criminality. Then came the subprime mortgage crisis, due to many Banks lending mortgages and loans without sufficient collateral (i.e. "subprime" or loans with greater than usual risk) over a period of many years. Starting in late 2006 about 100 lending insititutions failed or declared bankruptcy due to lack of liquid credit, causing many people to lose the mortgages on their houses. This number is now thought to have reached about 5 million! In September 2007, Northern Rock, the fifth largest provider of mortgages in the UK failed, and the crisis became global.
When quasi-public lenders such as "Fannie May" and "Freddie Mac" got into trouble the US Treasury bailed them out by guaranteeing their loans. But, when Lehman Brothers declared bankruptcy last week, the largest failure in US history, the US decided not to bail it out. Then came AIG, the largest private holder of mortgages in the US, and the Treasury was forced to step in to avoid disaster. Finally, the US Govt., represented by Secty. of the Treasury Henry Paulson, came out and declared that the US Govt. would in fact underwrite all bad ("toxic") debts of all major lending institutions, an unprecedented step, especially for a Republican Administration. As Pres. Bush later said, he is against Govt. intervention in the market, except where it is absolutely necessary!
There are now endless debates about who is responsible for this situation and which party/candidate has the best response. As to blame, there is plenty to go around. The Republican party and its previous Presidents, notably Pres. Reagan, was responsible for deregulating the stock market, that allowed some of the bad practices that lead to the current situation. However, the Democratic Congress was certainly responsible for the policies of extending loans to poor and working people who lacked the collateral to cover them, i.e. they were among the many sub-prime borrowers who caused the crisis. But, many financial leaders and institutions made a lot of money out of making these shaky loans, and now have retired from the scene, no doubt with their pockets lined with cash. So the crisis resulted both from the fat cats and the poor, from the Republicans and the Democrats.
In general, an economic crisis usually hurts the party of the incumbant. But, the situation today is so unique that it is difficult to predict what will happen. Pres. Bush is taking a Keynsian policy of underwriting the debts of the major lending institutions to the tune of b$700. This is unprecedented, and requires quick legislative action by the Houses of Congress. However, there is opposition to this step, first by right wing Republicans who resent the Govt. interfering in the market and second by liberal Democrats who regard it as a hand out of American tax dollars to those who have been getting rich and will now get away with it. But, the danger of not acting is too great, and both candidates and both parties have said they will support the legislation. The reaction of both candidates is being watched very carefully by the US public, who are the voters and account holders. How things now work out will determine to a large extent who gets elected in November.
Meanwhile, while the markets have responded very positively to the US bail-out, the systemic problems in the banking system remain to be resolved, and we are far from out of the woods yet.
posted by Jack Cohen at 10:50 AM
0 Comments:
Post a Comment
<< Home