Thursday, September 25, 2008

The banking crisis

A lot of Republicans have been deflecting the criticism of McCain's comment, "fundamentals of our economy are strong." They have been blaming the people who bought mortgages without the ability to pay. But this is not the cause of this thing. I'm not trying to make this a partisan issue though, I'm trying to find out who really is at fault.

Here is a brief explanation of the problem: The banks have used predatory lending practices to create money out of thin air. Because money is not tangible anymore but simply credit, they spent credit on mortgages. They were bought by investment firms on credit. They were insured by the insurance companies on credit, and then resold over and over again on money market speculation to make more and more money. When the housing prices fell, so did the value of this credit and investors saw these investments were worth nothing.

The biggest problem here is speculation. The same problem that caused oil to go up. Not only did they spend credit, they were spending future credit based on speculation of what their credit would be worth in the future. When the future becomes today and the credit is not worth that much, they are now in debt to themselves.

The other fork is they were giving out loans to create more speculation to earn more money when they shouldn't have. While some conservatives are blaming the people who bought the houses, these people couldn't have bought them if the banks were marketing and selling the idea of getting into a home with no money down. They gave misleading loans with adjustable rates because they got even more greedy. And then they bundled these at-risk into securities and annuities which should have very little risk.

Another aspect I haven't heard anyone talk about yet is the fact that the banks kept loaning to developers to keep building new homes which cause home values across the board to fall because of supply and demand. More homes, less demand, lower prices. They lent money to make money but lost value.

So the problem we're facing now is the bankers had speculated their debt would have so much worth today when it doesn't have any worth at all. This "bail out" is a misnomer, it is really price fixing, or price protection. They want to dump money into the market to make these useless security's value actually worth what was speculated.

This is a problem. Speculating on the money markets is essentially inflation (creating more credit than there is money in the market). The Fed wants to basically print $700-billion out and flood the market. This is inflation again. You don't solve inflation with more inflation. We're going to make the dollar very weak, and the purchasing power of the USD will drop once again. Canada's dollar is going to be worth more than ours!

We don't have to print this money out, we could borrow it. But who will lend us the money? China?

Foreign banks are buying our weakened banks, I say let them continue. If a bank has any future value whatsoever another bank with money should capitalize by buying them up. Barclay's bought Lehman Brothers. Banc of America bought Meryll Lynch. The market will correct itself. The deregulation crowd should stick to their guns on this issue and not socialize debt and privatize profits. But they should concede and fix the market so it works with real dollars and not speculative dollars. The gold standard maybe?

I don't think I have the solutions, please I'm not that full of myself. I'm not an expert on economics. But what I know is it is the fault of Wall Street, and they should suffer for their own mistakes instead of sucking money out of taxpayers to maintain their decadent lifestyles until they can find a new job. When a small business owner makes a bad investment, they live with it, they take the hit and rebuild. We need to let them fail, but we also need to make sure they don't take everyone else down with them.

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