OK, there isn’t an economic crisis in the usual sense. We’re probably not looking at a depression, and definitely not a Great Depression. Companies are producing goods. People are buying them.
Several years ago, however, financiers basically drilled a hole in their brains and are now shocked, shocked that their grey matter drippled out. They saw an great source of capital and took it. Despite all the yammering about how “deregulation” is the cause, there was really a long sequence of complicated events which led to this, and anything might have disrupted the chain.
!1) (and least) is the problem of Naked Shorting. Naked Shorting is a bad idea, and I have no idea why the SEC allowed it. In normal shorting, you borrow shares, sell them, then must buy them bakc by a given date and time to return them. Well, Going Naked on a Short is the same… but you don’t borrow them! When the market started to fall, some people smelled blood, and they simply sold huge numbers of shares they dind’t own.
I have no idea why this was allowed. Normal shorting helps the market accurately price shares of stock. Naked shorting is… controversial, to put it mildly.
(2) Freddie and Fannie Mae have been built on lies and political malfeasance for a long time. When they were spuin off, the government decided (in its infinite wisdom :rolleyes:) that it would be Rele Purdy Nice if they could get something for nothing. So they sorta hinted they might guarrantee FM&FM. Investors noticed this and the two were coming up ganbusters. They took inordinate risk, knowing the Feds were likely to guarrantee any failure.
Ths was compounded because the pair get their leadership group from bureaucrats with connections all over the government. This gruesomely incestuous relationship was targeted by a lot of people over the years, but no one had the clout to do anything about it. Even Bush and McCain got nowhere with their attempts to do anything about it, and both dropped the issue since it couldn’t even come up for debate The debate couldn’t even get started because FM&FM were buying influence with extremely unsavory “donations” left and right (pun intended).
(3) Politicians (yeah, mostly leftist, but also conservatives who thought they could gain off of it) pushed banks to lend more to minorities (and specifically, poor ones). Banks loosened their rules. Problem is, many poor people manage money unwisely, which is why they are poor. Or they may have a high icnome, but be finscally imprudent. To make matters wors,e Banks didn’t classify customers by race, so they actually lent more to bad credit risks who were white (or asian or whatever) as well as blacks and hispanics.
(4) Combine this unreasonably cheap credit with a real estate bubble and you have the makings of a credit crunch. Businesses need credit simply to operate, because they sometimes have short-term cash flow issues. They never quite know precisely how much they need in the short term (They want their moolah constantly out there making more, right? Right.), so they frequently take out quickly-repaid loans to cover any temporary shortfall. That’s much less available now, and banks and lenders are pulling back on it. Likewise, it’s hard to get long-term loans for expansion and so forth, too, which limits long-term productivity.
More specifically, this happened because once the real estate bubble burst, investors who bought up mortgages without actually looking at what was in them found they were going broke. With market price going down, the mortgages are, if not worthless, then pretty weak. Of course, it was their own fault for not doing their homework, but it affects the rest of us. But anyway, BAM: lenders are having cash-flow troublse themselves and don’t want to lend out.
The good news is that any trouble is likely to be temporary, but it could make for a very ugly year or two, where everyone involved points fingers at everyone else. As much as disagree with Bush’s economic policies, he isn’t the cause, and was arguably one of the more sensible leaders we have right now. I’m not I agree with the bailout plan, either, but it does make a certain amount of sense.
In theory, the bailout doesn’t cost Americans anything. What it does is lend cash to the financial institutions so they can restore their “liquidity”, or the relative ability to get cash in the short run.
Also, despite the credit crunch and mortgage fiasco, it’s not a bad time to get a home loan. If the bank thinks you are a good credit risk, you can get a very nice deal now.