Tuesday, October 21, 2008

The Financial Crisis: it's just getting started

Happy news, yes?

In lieu of an essay, here are some bulleted points on the financial crisis, with links.

• The claim that this problem resulted from free markets is wrong. There’s substantial evidence that government interventions in the market are behind this catastrophe.

• The credit crisis is one of mistaken and unsustainable investments. The resulting asset bubbles pop. We’re seeing this in housing now, and soon with other kinds of "investments" in consumption.

• There’s one thing that drives the systematic malinvestment: artificial credit expansion by central banks. The Fed led the way in this (see the post below), but other central banks are culprits as well. The artificially low interest rates and cheap money foster manias and asset bubbles. There’d be no speculative bubbles without them.

• An even deeper problem underlying this is the something for nothing mentality. In particular, central governments have taught that one can consistently consume more than one’s revenue. They have taught us this through entitlement programs that promise each of us more than we pay. The difference is made up by borrowing. As Adam Smith argued, if a nation consistently spends more than its annual revenue, it eats its capital stock and decays.

• Housing became the locus of the problem because of favorable tax treatment, government encouragement of lax lending standards, government encouragement of securitization of dodgy mortgages and tolerance of shady accounting and possible fraud (the Federal Department of Justice actually blocked several state investigations into possible mortgage fraud).

• Private borrowers and lenders jumped at the opportunities created by artificially cheap credit and favorable treatment for housing. Subsequent irresponsible (and often criminal) private actions poured kerosene on the fire.

• The credit bubble is far deeper than housing. Credit card debt, auto loans, student loans, commercial real estate mortgages, and the like are similarly overinvested, and will begin collapsing when the global recession really bites.

• Widespread bank failures in the United States are a near certainty. Expect 750 to 1,000 closures by March. (See 4.a.)

• A global depression (multiple years of hard recession) is increasingly likely.

Barack Obama is about to win the Presidency by a landslide (as predicted here in August). The Democratic Party will increase their hold on both houses of Congress. They are all beginning to talk of massive new programs of socialism that would out-do the nationalizations of Commissars Bush, Paulson, and Bernanke. They’d do well to reconsider, because government intervention has brought us to the brink of ruin. Increased government regulation and spending will push us over the edge. We’re on a course for national bankruptcy. It will take drastic action on behalf of fiscal responsibility to prevent this.

Socialism no! Spending cuts, yes!

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