Saturday, October 04, 2008

Drunken capitalist philosophy

After that glass of bubbly, I feel ready to tackle the financial crisis. As you do.

I am spectacularly torn by this whole disaster. I should make my bias clear, I work for the financial sector, if they go down the toilet, so do we, financially at least. My hubby works with me, so we have no diversity. On the other hand, I have no allegiance to this sector, I regularly describe my job as working for the devil. A sector whose only net output is inflation.

So, I really wanted the US government to bail these arseholes out. After some thought, it did dawn on me that by finding a perspective somewhere between my personal one and my idealism, I had to conclude that it was necessary. If the US government had not done it, life for the average American would seriously suck. Credit would disappear for the average American punter, making business and home ownership almost impossible. I have been hanging out for capitalism to crumble, and I had kinda hoped this might do it. But ultimately, no responsible government could have let the fallout of this mess hit their people. Yes, I have just described George W's administration as responsible. Perhaps there are some depths that no-one will stoop to.

As with all disasters, this was a multifactorial issue. A brief summary, as I understand it, for anyone who might be interested (please feel free to tell me where I am wrong, I am trying to really understand this). There were a bunch of people selling home loans to people who couldn't actually afford them. They were doing this by selling them loans with very low repayments for a year or two, which then went up dramatically. This is a model which is easy to justify for your 20 something professionals, they can expect their income to go up dramatically soon, and this sort of model helps them get into the property market sooner. But that's not who they were selling to. So for a few years, it was all good. Every time people's loans got too big to repay, they would re-finance on the basis of their increased property value. So they started out with $100k home loan, repaid less than the interest in the first two years, and when the repayments hit a level they couldn't manage, they refinanced for $120k on the back of the increased value of their property. Each time a home loan is sold, the sales guy gets a full commission, regardless of the long term outcome of the loan. Eventually, the real estate bubble bursts (as it must) and the house values have not gone up enough to refinance, and the whole disaster collapses.

What turned this into a stock market disaster was that pretty much all American banks were involved somehow. And to make matters worse, America in general has been operating on credit for a long time. So the banks were borrowing their money to lend to these people who couldn't afford it, from other countries. And all the time the banks were recording massive profits that come from charging interest on loans that are not making full interest repayments. This is where the "market failure" comes in. The market should (according to capitalist theory - no I don't believe in it, but our whole system is predicated on it) recognise the risk, and devalue the banks as a result. It didn't. It worked on the reported profits and never thought about the inherent contradiction in a competitive system with everyone recording record profits. Something stunk, but the markets didn't see it. The entire management structure of these banks chose not to see it. And so eventually the chickens came home to roost, and here we are.

And I still reckon that the mid week voting down of the rescue package by the Republicans was done so that the Republicans could go shopping in the incredibly low market before they voted it up. Yes, I am incredibly cynical.

From the point of view of all of us not living in the US, should this have been done? No, there are so many more important things that $800 billion should have been spent on - renewable energy, a cure for malaria, whatever. As a nation's government, did they have a choice? No. They had to do this. For gods' sake, America, please vote in Obama. At least he understands that the rest of the world is affected by his decisions. You've taken this indulgence, please consider the rest of the world with your next decision. Because lord knows Goldman Sachs do not deserve to be rescued.


  1. I wonder what's worse.

    Being an Australian and feeling you have absolutely no power in who gets to be the next American President.


    Being American and knowing you have one little tiny vote.

    You plead to American to vote in Obama. I wish/hope your words will influence SOMEONE.

    I can't even reach my own family. They're as stubborn and set in their beliefs as we are.

    I don't think many people are going to change their mind about whether they want to vote in Republican or Democrat. I guess we just have to hope that more people already have their heart set on Democrat.

    And then I guess there are the undecided people. I guess you could reach them. But in my mind, undecided are often going to be truly I-don't-really-care-or-pay-attention. So they probably won't even read your post ; )

    For those of us who care and plan to vote, I think most of us have already made up our minds. At least I imagine so.

  2. Thanks for explaining the financial crises in the US in understandable language. It seems it was a disaster waiting to happen. The bottom line? Greed + irreponsibility = meltdown. It was also obvious a bail out was needed, but too bad the ordinary taxpayers have to foot the bill. I'm with you Americans, need sensible, rational, and responsible leadership - the Obama/Biden ticket is definitely the one that ticks the boxes in these areas.