Friday, November 14, 2008

The Present Economic Crisis: Place The Blame Where it Belongs


Those that understand the role politics plays are way a head of me when it comes to a discussion of the economy. I admit, I am one of those backward individuals that thinks that when you are discussing economics, you talk about economics and not politics. How can I be so naive?

Yesterday, I listened to the President talk about the economy while I was painting. President Bush was talking about the economy and what brought about the current economic crisis. A lot of information was thrown out there, but one piece of information that I hear continually being thrown around is the myth, in my opinion, that this whole economic crisis was brought about by sub prime mortgages. This explanation is not right, in fact, I think this explanation places or shifts the responsibility of the economic crisis to those who had the least to do with it. Let me explain.

The sub prime mortgages in and of themselves could not have brought about the present economic crisis. It is my opinion that those that use this line of reasoning are more interested in directing blame and responsibility away from the real sources of the disaster. To make the poor that took out sub prime mortgages the reason for the crisis is to make the people least able to defend themselves the scapegoat for the meltdown. This is not the case if you look at the facts and understand how this crisis came about and how the pieces of the crisis fit together.

There is a big difference between a sub prime mortgage and a sub prime mortgage bond. Without the securitization of sub prime mortgages into mortgage bonds with AAA ratings, this current economic disaster, crisis, meltdown never gets off the ground. Once the mortgages were bundled into mortgage bonds and sold, and sold and sold, did the potential crisis become armed.

With interest rates low, investors were all too eager to “reach” for yield with the higher yielding asset-backed bonds. These bonds, which included the sub prime mortgage bonds, were priced attractively to sell to portfolio managers around the world. When interest rates were held down by the actions of the Federal Reserve Bank to keep the economy going for political reasons, investors that needed to buy and managed portfolios of fixed-income securities were faced with the problem of lower yielding and safer bonds, such as U.S. Treasury bonds and notes, or reaching for higher, yet more risky, yields that were available in the asset-backed bond market. Couple this with the failure of the rating companies to give these asset-backed bonds, which included the sub prime mortgage bonds, their appropriate ratings, given the risk involved, and you now have everything in place for the current meltdown that has lead us to the present economic crisis.

Do not blame this whole thing on sub prime mortgages. To place the blame on these poor people that took out these mortgages is nothing more than a lie or a serious distortion of the facts.

There is a reason to shift the blame away from Wall Street and that reason is regulation. The biggest cheers the President received in his speech the other day was when he said we do not need more government regulation of the markets.

If you have enough dots and lines, and you stand back and place a little light on the subject, a picture starts to come into focus. I can not draw a better picture if I had Rembrandt at my side. Blaming the people that took out sub prime mortgages for the present economic crisis is just plain wrong. To me, it smacks of scapegoating, and that is something that has gone on for thousands of years. Attack those least able to defend themselves has a long history. This economic crisis was brought about by the lack of regulation, oversight, transparency and finally enforcement of the securities laws on the books. The financial products that were created and their derivatives were not the creation of those people who took out sub prime mortgages. For the President of the United States to lay the blame for this crisis at the feet of the poor who took out these mortgages is just wrong, and people that know better have a responsibility to speak up.

Stay tuned.

6 comments:

LceeL said...

Sub-primes were the first or second pebble in the water, that's all. They instigated the crisis in confidence that has been the real culprit in all of this - and that's all the Pres-elect was pointing to, I think.

moneythoughts said...

Lou, it was President Bush I was talking about. He spoke in NYC yesterday to a group. I'll repeat myself. Without the sub prime mortgage bond, sub prime mortgages don't even get off the ground. It was the fact that the mortgages could be bundled into bonds that made this whole thing possible. And, that is just the beginning, there was a lot more risk taking that pushed the stakes even higher.

winslow said...

You are so correct. Misrepresentation (or lying, in some instances) is ingrained in our society. I never thought I would see the day when leaders or educated individuals would lie and cheat...but it is upon us. This is done 1) on purpose, to pursue the ends or 2)unknowingly because of one's belief or ideology.

It's my belief this has occurred because we are taught that what you have makes you successful. The more acorns you gather, by any means, the more success you achieve.

In the case you cited, Bush is either lying or really believes the subprime borrowers were responsible.

I just read an article in IBD on the 10 traits that make a good leader. One trait was a leader is always positive and never shows stress. I disagree with this. I would rather be told the truth......and then we can all work on a solution. Let's go back to the Bush administration the last several years....we were told the economy was not that bad and that the housing problem was self-contained and would not spread. So, were they trying to be "good" leaders, were they lying outright, or did they really believe all was okay? Maybe we'll know when their memoirs are printed and they prove how "successful" they were.

moneythoughts said...

I doubt that Bush or Cheney will write anything. Who would believe what they have to say? This duo is one for the ages. Hopefully, it will be another 200 plus years before this country sees anything like them again.

Butch said...

I agree, the poor just asked for the loans. It was up to the loan companies to not be so greedy and to simply say NO, you don't qualify. Same goes to buying cars but there are those lenders that you hear commercials for that say "have a problem with credit?" come on in we'll help you. How about the credit cards. They'll be next. Can't afford to pay for YOUR mistake, here we'll give you more credit.

Don't blame the poor or ignorant of the understanding of the financial ways of banks and loan institutions.

winslow said...

I have never seen the mood in America this negative