Must I repeat my answer? Having no solution or a bad solution. Today, I am addressing the urgent unresolved problem that became known as The Great Recession.
The Great Recession
Our expert scientists and economists of renown ought to be working together on this problem. Why? Because the scientists understand the laws of physics that pertain to social/economic problems. They believe that order in the universe tends to become disorder, and that when you cook an egg or break a plate, you can’t go back to having the egg or the plate in their original forms.
When order is disturbed, the only thing a human can do is try to contain or confine or curtail the disorder initiated. The economic disorder caused by the “too-big-to-fail” entities: Fannie Mae, Freddie Mac, A.I.G., and the huge banks in this country was alarming to some of us before the crisis. The political/economic risks ignored by responsible leaders led to irreparable damage to the world economy by doing nothing.
And the moral risk was to continue to allow bad businesses to prosper and continue doing things that might lead to further bail-outs. Numerous ad hoc decisions were made hastily by members of the past and present governments in an effort to halt the financial panic, but they didn’t actually address the basic problem.
I will comment about that problem using my 5 tools of evaluation of ineffective solutions:
1. Bad premises. The most glaring premises ignored by government authorities were:
Should everyone own a home? Should commercial and investment banks be merged as they were after the Savings and Loan debacle? Should gambling in derivative securities and swaps covered by insurance policies inadequately backed by capital go unsupervised? Can the government effectively control today’s brash investment community? Should bailing out “too-big-to-fail” companies with dangerously low capital to debt ratios be a policy in the future?
If you answer “yes” to any of these questions, then your solution is born dead.
Now the basic premise behind launching any enterprise in a capitalist country (a fundamental premise that has been consistently ignored by authorities) is that “doing business” is a big gamble. Unfortunately, the general public is unaware of the potential consequences of modern business gambling practices. These consequences are severe when individual companies are poorly capitalized, mismanaged, heavily indebted, and casually audited. Most consumers take for granted that a business with a respectable “store front” or TV image is being properly run.
GMAC was not only financing the sale of their vehicles, but also homes. GE Capital and other financing entities were venturing outside of their primary mission of financing their manufacturing company’s products. All ventured forth until the recent financial collapse with the business objective of making more money easily. That’s called gambling, folks!
If GM and Chrysler were being run by conservative “gamblers,” how come they were facing bankruptcy and needed a bail out? And who were bailed out? Not the people who stupidly bought homes they were unlikely to pay for. Just those companies considered “too-big-to-fail!” Now the FDIC are closing undercapitalized banks as they did during the earlier Savings and Loan crisis. Did the FDIC learn anything from that exercise?
The decisions not to face up to the causes that brought forth the collapse of the housing market are glaring and were obvious to the whistle-blowers who worked in the banking community and in the financial institutions. The whistle-blower who tried to alert the SEC to Madoff’s Ponzi scheme was ignored for years.
2. Untimely action. Obviously the door of the barn was partially shut after all the horses had escaped and none of them were rounded up and punished by authorities!
3. Unfair regulations. There were none to control “derivatives” and “swaps,” and there still aren’t after two years of inaction.
4. Shoddy implementation and follow-up by authorities. The bank examiners had their hands tied. The attitude that “everyone else in the business is making money doing this” became prevalent. Who could resist the temptation to gamble with the company’s and the bank’s assets?
5. The whistle-blowers were silent or ignored everywhere. No one wanted to burst the housing bubble caused by poor government policies of ridiculously low interest rates, easy terms to qualify for a loan, and inadequate capital reserves in banks.
And the solution tendered by Congress today: more recession, more dillydallying about taking prudent action, and more gambling on Wall Street because those who got away with it are rich and well connected, potential donors to election campaign funds!
Who is teaching the man and woman in the street what the capitalistic game is about? It’s putting up money to gain a lot more than you “invested.” Bankruptcy, loss of assets, and some jail time are the potential consequences for imprudent gamblers, but not for those who were “bailed-out.”
Can you spot a “bad” solution being put together in the slow reaction of our ultimate leaders when interest paid to money market savers is a pathetic 0.15% per annum? What does that insane policy cause? More gambling in risky financial ventures and consequently more losers!
Again I humbly remind you: what is far worse than having a serious problem is adopting an inadequate and ineffective solution to address that problem! Any partial solution that tolerates more disorder by not confining, containing, or curtailing economic gambling is very dangerous.