Friday, October 10, 2008

Two Interesting Posts (from other sites) About The World Financial Situation

The short one


the long one....

So who, exactly, is responsible for the US portion of this mess? To be blunt, there's no one person. There are lots of people involved, and several bureaucracies and agencies and organizations. There are people at the head of those groups, but no one person is responsible. Some groups are more responsible than other groups, but that's about as close to finger-pointing as I can get.

But you might imagine which groups I would list as "more responsible than other groups" :-)


David said...

Don't underestimate the importance of bad mathematical methods for risk analysis. (Indeed, a discussion of "math and the markets" might be an interesting interesting for a math class.)

Fritz J. said...

You are correct when you say no one person is responsible for the U.S. portion of the financial mess we find ourselves in. Were I to assign blame most of it would be directed at our congress and specifically at the Democrats in congress, although the Republicans are far from blameless.

The housing meltdown, which triggered most of the current financial turmoil, is the result of our government mandating that people with poor credit histories be approved for home mortgages. Under Pres. Carter the Community Reinvestment Act was passed and it was later modified under Pres. Clinton. While the idea against redlining was good, the results of it amounted to forcing banks to furnish mortgages to people who had no ability to repay them. Enter Fannie Mae and Freddie Mac who bought those mortgages from the banks and packaged them and resold them with the tacit understanding that the government would make good losses (Fannie and Freddie are government sponsored entities) and soon the bad mortgages were spread throughout the financial industry.

Our congress, which was charged with oversight of Fannie and Freddie, refused to exercise that role and also refused to relinquish that role to anyone else, as Pres. Bush and others have recommended starting as early as 2003, and the result is the housing meltdown.

As for why congress refused to exercise oversight, the simple answer is no one wished to be called racist. It was perceived that any tightening of the mortgage rules would affect blacks the most, since they benefited disproportionately from CRA, and you soon end up where we are. In short, the Democrats were trying to pay off the Black Community for their support at the polls, and the Republicans were unwilling to challenge them for fear of being tagged as racist.

When the U.S. markets started to implode it triggered a world wide examination of other markets and it should surprise no one that other countries are guilty of similar financial missteps.

There are tons of details I've left out of this because a full explanation would be many pages long and cover a lot more, but striped to its essentials that is what happened. As for my placing of the blame mostly on the Democrats, check and see which party it was that supported CRA and further blocked any attempts to supply meaningful oversight to Fannie and Freddie.

As the old saying goes, the road to hell is paved with good intentions and I believe that the Democrats were motivated by good intentions, but their intentions also brought about unintended consequences resulting in the current mess. The cold hard fact is that in the world of money, intentions will never take the place of financial soundness.

One last thing, the U.S. economy is so large that any hiccup it suffers will trigger repercussions throughout the rest of the world's financial markets. Had the U.S. government acted in a responsible manner instead of acting in a political manner, the rest of the world would not be suffering the problems it now is.