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.