The financial meltdown on Wall Street is more than a cyclic correction brought on by a mismanaged business cycle. It is emblematic of a problem at the very foundation of the right wing economic philosophy that became conventional wisdom during the Bush years -- and would be continued in a McCain presidency.
The zealots of unfettered "free markets" cast aside the critical lesson that the world learned during the Great Depression: left to their own devices, unregulated financial markets do not necessarily function to benefit the society as a whole -- or, in the end, even many individual market participants.
The fundamental premise of right-wing economics is the incorrect view that if every market actor pursues his own economic interest, the "invisible hand" of the market place will assure that the "common good" results. But of course, common sense tells us that is not always true. Two quick examples:
The first is referred to as the "tragedy of the commons." Suppose an island nation depends on the fishing harvests from the surrounding sea for its livelihood. It would obviously be in the interest of the community never to take more fish from the sea than can be replenished through the reproduction of fish. That way, everyone on the island will continue to have fish for the long haul.
But it is in the interest of each individual fisherman to catch as many fish as he can. This is especially true if the fish stocks grow scarcer. To continue to have enough fish for himself and his family, each fisherman competes more and more vigorously for the remaining fish. In the end, this behavior will assure that the fish supply is depleted, and that no one has any fish.
In this situation, if everyone pursues his own individual interest, the common good is not served. But if everyone looks out for each other, and recognizes that all have a common group interest, they will manage the fish resource to assure a self-sustaining fish supply that can feed everyone for years to come.
The other example is the classic case of economic recession. In a recession, it is in each economic actor's self-interest to increase his savings and cut spending, since the recession threatens his income. But by each pursuing his own individual interest, all of the actors together reduce the economy's overall spending. And that deepens the recession. If, on the other hand, the entire group of economic actors works through its government to increase national spending and reduce overall savings, it will stimulate the economy and the recession will end -- benefiting everyone.
The American mortgage market now provides us with another clear example of how this fundamental premise of right-wing economic thought is dead wrong.
For many years after the Great Depression, most mortgages were provided by banks and savings and loans. Traditionally these institutions would originate their own loans, evaluate the risk, and maintain a relationship with the borrower. It was in the self-interest of the institution to make loans -- that's how it made money. But it was also in the institution's interest to assure that the borrower could pay the loan back, because it was lending its own money.
Over the last thirty years, the mortgage market has fundamentally changed. Now most loans are originated by brokers or other mortgage companies who make their money through "origination fees" and often payments from big, unregulated lenders. Once these loans are made, they are then packaged and sold as securities through the secondary mortgage market.
Mortgage originators had every incentive to make all the loans they could, but absolutely no incentive to assure that the borrowers could pay the loans back. Credit standards were relaxed, new "sub prime" products were introduced, "no-document" loans were issued.
This system provided a great deal of liquidity to the mortgage industry. But it also removed the risk of making the loan from the loan originator and handed it to a huge, diffuse "market." No longer did any individual or institution have any individual incentive to prevent bad loans.
The problem was simultaneously hidden and exaggerated by the creation of complex derivatives -- securities that sliced and diced the risk and allowed it to be sold and resold.
As long as housing prices went up, the problem of bad loans were hidden by the rising equity of the collateral -- the homes that were being financed. But once prices stopped rising and began to drop, the bottom fell out.
Left to its own devices, the mortgage market itself could not solve this problem. It was in the loan originator's interest to issue more and more risky loans and it wasn't in the interest of any individual market player to control for risk, since the securities representing that risk could be sold a minute after they were purchased.
The only solution to this problem would have been the kind of regulation that was put into place for banks during the New Deal. With banks and with savings and loans, regulators guarantee a substantial portion of the depositor's money, but they also ensure that the mix of loans and the bank's overall financial structure is sound. Today the major source of mortgage capital is not banks or savings and loans, but from financial institutions that are almost free of regulation.
The same went for the two institutions that were set up to create this "secondary mortgage market," Fanny Mae and Freddie Mac, before they were taken over by the government last week.
The kind of regulation that was necessary was opposed by the Bush administration -- and the entire right wing business and economic establishment -- that is trying desperately to hold onto power by electing John McCain to continue the Bush presidency.
So now the chickens are coming home to roost. The taxpayers are helping to bail out some of the players, the stock market is tanking, mortgages are harder to get -- further reducing home values and making the problem worse.
And unbelievably, John McCain told his audience that he would "clean up Wall Street."
John McCain's chief economic adviser is Phil Gramm -- a former economics professor -- who is now Vice Chair of UBS, a huge international financial company. He's the guy who said that the problems of the American economy were "in the minds" of the American people -- that we are "a nation of whiners." Gramm is an ardent advocate of precisely the right wing economic philosophy that caused this problem in the first place.
Gramm and McCain believe in letting the guys with all the money do pretty much what they want because, they say, it will ultimately benefit us all. They are the ultimate crusaders for "trickle down economics."
The problem is that the foundational principles of this economic view have been proven wrong by history. And after a while, the victims are no longer limited to the vast majority of Americans that has suffered for the last eight years -- the pain even spreads to the wealthiest denizens of Wall Street. As Barack Obama said yesterday, we hear a lot about the benefits of the economy "trickling down;" now we're beginning to see the pain of the economy "trickle up."
The central lesson of this saga is clear. If you like the Bush economy, hire McCain. Over the next seven weeks, however, Americans who care about our economic future have to join Barack Obama in saying: enough.
Robert Creamer is a long-time organizer and political strategist, and the author of the recent book "Stand Up Straight: How Progressives Can Win," available at amazon.com
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here is the link:http://mon
Who is Obama's economic advisers? The Ex CEO's of Lehman and Fannie Mae GREAT CHOICES
Who was running the oversight committee on Fannie and Freddy Democratic Franks
Who was in control of both houses of congress the past 2 years...de
Who has NO opinion on the AIG bailout...
Who during the gas crisis did nothing except go on vacation..
Who are McCain's economic advisors? Phil and Wendy Gramm, those who not only gave us the CURRENT crisis, but also Enron!
Who has been in control of both houses for 12 of the last 16 years?....
Who created the gas crisis this year, and last year, and the year before all the way back to 2003??? republican
The iodea that "we will go out and look after and resurrect our place where the wild cowboys cant get at the monet has a n added notion-- part of the money isnt even going to arrive at Tombstone bank-- so how can Mary jane borrow the money for her wedding dress and little house when the money is less[er] --- Perhaps those banks Susan financed will help and will cvretwe more service jobs as well and more sheriffs to look just after them --oh dear
Ken Courtis of Goldman Sachs Asia and now Group eastern General has just had a discussion on Australias National ABC TV current affairs abc.net.au
He has told the west that China has interests in Fanny Mae and Freddy Mac and implies that they must be protected. He says that power must shift re the control the financial sector away from the USA and to China and Asia.
This to me shows the survivor of this melee displaying observable features of this melee at an instant and that is that ideology is playing a part in the non theories and this is as observed by Isiah Berlin [Mr Courtis appears to be jewish. ] British Jews have not yet responded to Mr Courtis but the coincident
Morgans appears to be collapsing and so power has been shifted in line with what Mr Courtis has indicated is and has to happen as a matter of ideology [ Isiah Berlin warns against ideology]
Are you listening to the Presidents crisis speech as it occurs about sometime now
It has also been my observatio
Then in the next election cycle when the problems are still w/ us the republican
If you follow then Schumpeter do u think in the present climate of the USA that democracy is the rule of the politician --
Do you see democracy threatened by the events at the moment and their timing near election in USA and possiblity of first African American President
--The chaos may show a sub prime or a magnus at instant in time-- but what theory created the following-
One of the big new players in the swaps game was AIG, the world's largest insurer and a major seller of credit-def
As of June 30, an AIG unit had written credit-def
There see-- thats the problem defined by the theory-- what theorem
What theorem in the melee-- the theorems they tried to hoist on world leading mathematic
People got to work, they make something and someone sells them something and they might buy a house and an insurance policy roughly proportion
Bloomberg i am told-- in 2006 published the fact that one ceo of Lehmans was given 38 billion. That according to Bloombergs the 650 billionwhi
now if you take Bohrs theory and divide by two then on all exports put a negative sign so that preferred trade can occur then we can--- well their pretty good bonuses --now about infinitess
Isiah Berlin points out that ideology is the opposed to politics and the idea of Liberal [of any colour] thought ie positive and negative liberty
This very good article might suggest that the allocation of resources has not occurred , plural democracy however diminished has been negated
The article might also suggest that there is a group, a tribe , us, we, and that the idea from the tribe has been negated [[ the "idea" as explained by Emile Durkheim. and its origins from the necessary tribe in anthropolo
This administra
They think that if you give tax deductions to the top 5% and large corporatio
So nothing has been trickling down as they say it does .
What we really needed was to create jobs here in our country for the blue collar workers not just the white collar corporate workers .It is the poor working class and the middle class that support the economy and keep it strong and both have been ignored far too long !
We also need to do something about holding those lenders accountabl
McCain is so out of touch if he still thinks our economy is basicly sound .
Obama economic policy makes far more since than
Logically those who suffered that fate on a false premise of legislatio
Communist sytems have older leaders , more wisdom and intercede in matters economic in very quick ways. The political theorists say that a communist system must likewise fail because it lacks and does not allow the threat of invention and imaginatio
It's interestin
Well, now we see the results of voodoo economics. As Dr Phil would say - how's that working out for you?
Democrats must call them on it every time.
Doesn't everyone know that Clinton and Democrats left Bush/Chene
With 8 years of Republican
I think we'd better show the world that a new party is in town, and it's not a couple of pretend mavericks from the same Republican party.
Time for a change, all right.
And one more point. Had we kept Clinton's number going, even with the economic turndowns that we have experience
http://pow
Now let's take a look at Freddie Mac and Fannie Mae. I noticed you failed to mention that both of those institutio
1. De-Regulat
2. Cut Taxes for the wealthy
3. Big Military Spending
4. Bust up the Labor Unions
5. Cheap Labor
6. Cut Social programs
7. Money from the rich will Trickle down to the poor
Lets not forget the unforgetta
"No Child Left Behind"
The financial / housing / mortgage bubble is just the beginning.
What happens when more jobs continue to be shipped over to China and GM-Ford or Chrysler goes under?????
What happens when cities start to go bankrupt because they can't raise bond money or make payroll???
What happens when we invade Iran and get the crap beat out of us, because the Army grunts are burnt out????
What happens when gas rises to $5.00 a gallon and stays at $5.00 a gallon???
Just asking....