After such a crazy week in our markets you are entitled to ask a simple question: What in hell is going on?
We need a book to answer that fully. I will try to answer a few smaller queries.
Who is to blame for the mess? To blame Bush is silly. Those who do are usually trying to win votes. Or they just like to barbeque scapegoats.
Seems to me a more likely scapegoat is Congress of several years ago. It forced banks to lend money to anybody whose pulse reached 20. This opened the doors for abuses by lenders and borrowers. And this led to the housing bubble and credit crash. (The Fed made some unwise moves in this too, making credit too available.) The housing and credit crash have brought the downfall of some mighty houses.
How about greed? Sure. It played a role. But that critter always lurks outside the door. In this instance, Congress swung open the door and set out some bait.
So, what is government doing? Every other headline speaks of massive bailouts and takeovers.
Government is taking over some entities, like Freddie Mac and Fannie Mae. They were government operations to begin with. Government clearly does not want to hold onto them forever. It will likely break them into smaller pieces and float them back to the public.
Government hardly wants to run AIG, the big insurance company. The Fed loaned money to it to keep it from crashing and spreading turmoil to other firms. Good chance it will sell off parts of it in an orderly fashion.
In the large picture what is going on here is “creative destruction.” That was a term a famous economist used to describe a flexible and ultimately healthy economy. Creative forces - better ideas - constantly develop. They destroy older ideas, less efficient entities.
You can see creative destruction in your home town. In most towns the old time Main Street stores have suffered or closed. They were destroyed by shopping malls created outside of town. Typewriters were destroyed by computers. Black and white television by color. Old phones by Blackberries.
In this financial mess, less efficient businesses are being destroyed by more efficient ones. Banks that made lousy decisions are losing out to those that made better ones.
The economist who described creative destruction would probably have preferred outright destruction. To make way for the newer ideas. However, destruction of stores and banks inflicts pain on millions. Governments try to soften the blow. They create buffers and parachutes. Yes, AIG may fall to earth. Government will make this a gradual descent and avoid a crash.
Prior to the Great Depression governments did not play such a role. So many people became desperate in the 1930’s, FDR plunged government into the mess. Over the years it has expanded its role.
Now, lots of folks don’t want to know the details about what is going on. But they would like some simple explanation.
My attempt is to liken the economy to the state fair. Ladeez an’ gentlemen, we got yer rides. We got yer cotton candy. We got yer hot dogs. We got stalls and activities and parades. We got a zillion activities going on at the fair. Just as we have a zillion businesses and purchases and sales going on in our economy.
The fair operators don’t own those activities. Your government does not own your economy. Both try to regulate: You can sell this, not this. You can do this, not that.
Both try to help out those in trouble. If the guys who run the rides are shaky, the fair may loan them money. Because if the rides close down, the fair will suffer. Well, some of the outfits that run the rides in our economy needed help. AIG, Freddie, Fannie. If they failed, the economy would suffer. Just like the owners of the fair, government is trying to keep the Ferris wheel turning.
From Tom ... as in Morgan.
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