By: Kelly Karpenske
Today our country faces its greatest financial crisis since the Great Depression. The blame does not fall on the hands of a few people, the president, the Wall Street investor, the secretary of the treasury. It is not the fault of a few greedy investors who are trying to dig themselves out of a hole. New government regulations will not solve these problems; maybe government regulations are a part of the problem. Our economy needs to grow. This crisis was not expected. There was no way to look into the future and predict that this fall was coming. There was obvious danger, but there was no specific way to calculate what has occurred in the past few weeks.
What has brought us to this financial crisis? Possibly, money has been too cheap. The Federal Reserve to sustain our economy through the 9/11 and other difficulties set interest rates lower than they have been at any point in modern history. http://www.rsfsocialfinance.org/investing/summary-of-rates-terms/past-interest-rates/
This move came at a time when global investment funds were many times larger than at any point previously. As a result, billions of dollars were looking for an investment home. With interest rates historically low, it was possible to borrow even more money and loan it out at a higher rate, still very attractive, in the form of home mortgages, making a profit on the difference in interest rates. That opportunity was in part made possible by a long-standing government policy. It has been the goal of both major parties since the Second World War to increase home ownership among our citizens. New laws and regulations have sought to encourage mortgage lending to an ever-wider circle of Americans. Private investors, encouraged by those policies, created mortgage-backed securities to provide money for buying homes.
Home ownership in the United States is at a historic high. If it is good for people to own their own home, and for many people it certainly is, then our government has pursued a wise and honorable policy. http://www.danter.com/statistics/homeown.htm
As it became appealing for investors to enter the mortgage market, they had the strong encouragement from our nation’s laws and regulations, and the means. Investment banks, when they bought mortgage-backed securities, were doing what the government encouraged them to do. Truth is… we all want to live in a country where it’s easy to get a mortgage and buy a home. And we elect a government that aids in that goal, investors only follow these processes.
When too much economic interest develops it tends to grow in one direction creating a disproportional “bubble.” These tend to burst. This is not the first or the last bubble to burst on America. Bubbles result from the greed driven economy that we call America, from every level of society, not just the wealthy.
The reason that this bubble is seriously bursting now has to do with what the government did in response to the Enron crisis. When the Enron corporation collapsed there was no correct value for their investments and so Congress passed a bill forcing corporations to put an immediate value on their investments in order for immediate sale if necessary, to protect American from the future Enrons. http://www.whitehouse.gov/news/releases/2002/07/20020709-4.html
Investments in these mortgage-backed securities right now are almost impossible to sell because no one knows how many of the mortgages are actually in default. Though the housing crisis is severe, it is not lethal. Almost 95% of American homeowners are paying their mortgages on time.
The vagueness of these mortgage-backed securities has meant that their market is not cashable, meaning; buyers are not ready to buy them immediately at a realistic price. Investment banks holding those securities have been forced to value them at zero because the market for them has disappeared. The securities aren’t worth nothing being that the vast majority of mortgages are being paid off, and those that aren’t, are collateralized. With time the value of those securities will be much clearer. But the rule requires that these investment banks take an immediate loss on their books for these securities. When a bank has to devalue its assets, it must raise more capital to continue to operate. Because more than just these companies are affected, there is not enough capital to go around. Only the government, having such vast quantities of money can step in.
This “bailout” is not a deal to save the rich and let the poor suffer further demise; it is a investment into the future of America, keeping money in the economy. If these banks fail then we have no money in our economy to buy cars, or homes, or pay for college. Businesses would lack the ability to purchase goods; manufacturers would lack the ability to buy raw materials. This “bailout” is to keep America out of poverty. These banks are where our money lies and without their investments we have no economy.
This bailout is not the first in our nation’s history. Alexander Hamilton and George Washington worked up the first government bailout. Clearly it worked, it’s not for nothing that Washington’s picture is on our one-dollar bill and Hamilton’s on the ten. They did the right thing, as did other national leaders throughout the years.
The treasury department had to act quickly. $900 billion dollars is a lot of money but that money can be remade as the assets acquired in this “bailout” are sold. America may even make money from these actions. http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=348876&story_id=12281280
The future president, the current presidential candidates, really have no place in solving this crisis. By the time they take office in January 2009 the solution will be well underway and this “crisis” will not be on the agenda. However, the economy is important and will continue to be an important issue in American politics. But no one can predict what the economy will look like on inauguration day. The president does not manage the economy. They do not create jobs; this credit goes to the hard working Americans who create capital in creating businesses and jobs, money and investments. There is no end to the cycle of our economy, it has its ups and downs because people act based on what they know, not what they don’t know yet. Humans run and influence the economy; therefore the economy is consequence of human action. The government, although a part of the solution, cannot solve the ever pose able problem.
The first problem with these presidential agendas is that there can be no promises appealing to the greed of some while raising the taxes of others. The richest paying a few more dollars in taxes will make the least fortunate no richer. No one ever taxed a country into prosperity. American tax rates can be adjusted to make us more competitive globally and more prosperous domestically. The fact that our corporate tax rate is second highest in the world does not help us keep jobs in this country.
“I believe that America’s free market has been the engine of America’s great progress. It’s created a prosperity that is the envy of the world. It’s led to a standard of living unmatched in history. –Barack Obama
Second, we cannot ask for more oil and cheaper gas and all the while blame big oil for our problems. We cannot criminalize these corporations we need them. Third, there will inevitably be failure in business. Many more are asking for a “bailout” but the truth is these corporations are not being “saved.” These corporations are being sold off to preserve our financial system. There can be no special needs. Failure happens, but we can work to maintain governmental efforts for workers and industry when such failures occur.
Now is the time to take action to address this crisis and take action to put our economy back on a path of growth. –John Mccain
Lastly, there needs to be a clear line between government and business. Neither government nor business can fully provide the solution. Government creates law to make business possible and businesses must provide clearer dealings between their people. There has been failure of regulation and failure to regulate and these are both necessary for a sound economy. http://usinfo.state.gov/products/pubs/oecon/chap3.htm
Americans are blessed. At every level of our social class we enjoy housing, food, clothing, education, medical care more than at any time in our country’s history. Our economy is enriched as our country continues. We are all benefiting from the culture, constitution, and business that allow us to pursue life, liberty and happiness.