On the matter of the source of the recent economic downfall, for which the States is largely culpable, I don’t understand why the mechanics of the situation aren’t talked about. There’s been a lot of talk, but most has done little to clarify the source of the problem. True, I think some of it is complex and has more than one source. Certainly, there is more to it than just Fannie Mae, Freddy Mac, and the US (although they are the catalyst). To add to the world-wide problem, the ING bank has recently received a monetary bail out from the Dutch government –to the tune of a whopping 13.4 billion! ING points the finger to the US, and insists that they continue to have a healthy business.
But let’s talk basics. As I understand it, some economic problems are due to overzealous and unethical lending of money past its reasonable point of “lendability”. Due to loosening government regulations –a sign of the cozy relationship between government and business.
If you were a bank, you wouldn’t want to overstretch your ability to payback investors/or bank clients. You couldn’t loan much more than what you have, and certainly shouldn’t loan more than you’re statistically able to give back to the client at any one time –which works out to about 20% if I recall. Lending more than feasible is not only greedy, but stupid and is a disservice to customers –and the world in general because it eventually affects everyone.
Now how does this affect a nation or the world? Well, if I were a large investor, the sort that influences mass economic trends, and I grab a whiff that a certain bank or mortgage lender is overstretched, I’d “lose confidence” –meaning that I’d start to doubt their financial feasibility. The result would be a ceasing of investment with culpable entities and even in the associated country in general. And if permissible, I might even pull any invested money out. Less money coming in means the economy dwindles, down-sizing starts, jobs are cut, etc –all affecting the little guy. The fact that the world economy is so intertwined these days, what with eliminating protectionist trade tariffs of yesterday –another great idea– an economic downfall in the States was sure to be felt around the world.
But why are business regulations so lax? Well, due to a religious-like belief that the market regulates itself –during the last generation or so (in the states and other countries)– governments have been deregulating business practices. I still find people who hold to this belief, despite that the unfolding recession proves otherwise –my father for instance.
To wrap this up, there are other reasons for economic downfalls, such as promising higher investment returns than viable, excessive investing into high risk investments, and probably more, but the above model is classic, easy to understand, and serves to illustrate how misguided religious-like fervour for an ideological panacea, greed, and stupidity hurts the entire world’s economy. In the case of the States, the problem was not with the banks per se, but with the backing –Fannie Mae and Freddy Mac.
Let’s hear it for the government officials that de-constructed business regulations and effectively are to blame for the economic downturn. Good job guys! We’ll now have to re-implement what you’ve torn down –after picking up the pieces of the mess you’ve left behind!
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