...as taxpayers and innocent investors bear the brunt
If the market demands that governments have limited role in economies, why are they being called then to save economies and private companies that made unwise investment decisions by lending money to people with showdy credit histories?
As a taxpayer I and many others were not involved in the gamble that these private companies undertook in a bid to reap maximum profits and yet we are now being forced to pay for their imprudent lending.
This failure once again shows the volatility of the market economy and its danger to the hard earned investments of innocent people who ultimately become victims. Also, this shows the misguided myth that governments have marginal roles to play in economies.
The market cannot have its cake and eat it too. It desires to embark on unrestrained gambles and when those gambles don't pay off it turns to us for salvation. And yet when we make suggestions about its operation we are sidelined or treated as some lunatics who don't understand how modern economies work.
Interesting book to read: Keen, Steve, Debunking Economics: The Naked Emperor of the Social Sciences, London: Zed Books, 2001.
6 comments:
It's not the banks that are at fault. The business of a bank is to make money and maximize profits for their shareholders. The fault lies with the idiotic American public who were willing to spend more and more money of Real Estate when it was obvious prices were spiralling out of control. People out there were buying 4 and 5 houses thinking that the equity growth would continue unabated. For thier part banks should have been a little more prudent but it is not the responsibility of banks to tell borrowers what to do. It wasn't the banks telling borrowers to bid up the prices of homes way beyond their ability to pay the mortgage. Americans need to stop this practice of never taking ownership of their own actions something Zimbabweans seem to be copying at the moment. It was the greedy American consumer who caused this crisis and they should be the ones to pay when they are foreclosed on. Those of us who did not take part in the crazy price wars of 2005 will be able to take advantage of the situation. It should not be the responsibility of the governement to rescue the irresponsible borrowers.
I accept that the ordinary Americans should take the blame as well, but the banks also had the lock to the safe. As professionals entrusted with the lock, they let the greed layman dictate how the market should be run.
If we are blaming the people more, why are the very lenders now holding on to the key to the safe for dear life and refusing many people mortgages, for instance. Why did they not do that in the first place. But even that being water under the bridge, these people who have always clamoured of no role of government in the market have come to ask for our money to clean up their mess. And aso, its bad, as you put it that we all have to suffer for the greed of some American "investors".
But I like your comparison of the Americans to Zimbabwabweans who will not take ownership of their own actions. Sounds real familiar!!!
There are bubbles everytime, that is the nature of the market. For once I agrea with Kuthula, the government had no right to bail out the investors by purchasing shares, that smacks of hypocrysy of the worst kind, the government will not help stabilize my business but will stabilize the business of Goldman Sachs and JP Morgan, again, bubbles happen all the time, that is a signal that the market has overpriced itself, it is part of the market, the market then corects itself by people selling of assets that they bought at inflated prices, been happening for over 4 000 years, since babylonian times. But you both seem to agrea, the government had no role in rescuing irresponsible banks more than borrowers.
I think for once Kuthula and I are in partial agreement maybe the only difference being the amount of blame we place on the borrowers versus the banks acknowledging that they both in fact deserve part of the blame.
The reason why banks are cutting back on lending is because they can no longer sell the bonds that they were selling which were backed by these sub prime mortgages. I don't know how much you know so I will explain what I know in detail. Residential mortgages are pooled together in what is are known as Residential Mortgage Backed Securities (RMBS), these are then sold to investors, well what happened is that investors recognized that the risk associated with these subprime mortgages had increased due to the increasing interest rates that people were paying on their vartiable mortgages which would lead to defaults/foreclosures. They basically stopped buying the bonds and if the banks can't sell the bonds to the investors they are sure as hell are not going to make more risky mortgages that will end up on their books.
My view is that when a lion kills and eats a buffalo it is simply doing what it was intended to do, I see the banks as simply doing what banks do, they make money by lending to borrowers and then selling that debt for profit. When a Zebra attacks a lion I think what a stupid Zebra, it is taking on more than it can handle and will surely be killed, the borrowers in this case are the Zebra biting off more than they can chew. This is why I believe they deserve the lion's share of the blame.
Yes, I have a very clear understanding of the subprime mortagage operations and the subsequent debacle.
Well, I will not be engaged in the amount of blame to apportion. I think we agree that both sides were wrong. I am worried about having the government come in using our money - when we were initially told that it should have no or minimum role to play.
No arguments here. As you and I both know there will be a chorus of people who are likely to lose their shirts in this ordeal clamoring for more governement involvement evoking thoughts of little old ladies being thrown out of their homes. Once this picture it out there it will be hard for politicians looking for votes to keep their dirty hands off of the issue.
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