[ariesmars]

i dont follow anything so i stupid. but what happened to the economy, when and how? why is it so bad? who did it? is it rigged for profit for select few? does gov really care to 'fix' it?

[Aunt Donna]

Things happen. People, businesses, make bad decisions. Hurricanes and the offshore disaster really hurt Louisiana. People lose their jobs when they have to relocate temporarily because of disasters. The government can try to fix it but everyone and everything needs to work together.

[Timgt5]

You ask a great question and no you are not at all stupid for asking it.

The answer is rather complex, in fact there are books written about this situation, and of course you can turn on the TV and here a lot of talking heads yelling at each other about whose fault it is, the answer though is the one no one has the guts to admit-everyone.

I will try give you a fair assessment in broad strokes

If you really want to understand the current malaise you have to go back into history a bit, to the late 70's to a well intentioned law called the Community Reinvestment Act. The purpose of this law was to help disadvantaged minorities take the first step into home ownership. This rule allowed banks to relax some credit requirements for lower income folks. Banks knew of course they would risk higher defaults but could absorb those losses relative to the rest of their portfolios.

Over the next decades the government began pushing the idea of having as many homeowners as possible. It was thought that homeownership could provide family stability and reduce poverty. So over time more programs were developed to help people achieve homeownership. Traditionally one established equality by putting 20% up front. Those requirements were relaxed based on the idea that homes increase in value over time anyway.

In this scheme however banks ran into limits that were set in place a long time ago. Back in the thirties, in an effort to protect society from “bank panics” rules were established that required banks to maintain a certain amount of deposits versus the amount of money outstanding. That means banks were limited to how many loans they could have outstanding, enter “Freddy” and his sister “Fannie”

The quasi-private, government backed mortgage brokers, Fannie May and Freddy Mac, bought mortgages off of banks and resold them to others. The idea was to free banks to continue to make more loans.

This processed worked well for many years, homes went up in value, more people became home buyers, and the banks prospered off the origination fees and loan officers moved well into the upper middle class. As with many things too much of a good thing, turns into a bad thing. In 2000 Congress passed and then President Clinton signed off on a repeal of the Glass-Stegal act. This law was a child of the Great Depression that placed a wall between “Investment Banks” and “Commercial Banks” Now we have the stage set for a disaster.

Some bright boys on Wall Street got the idea of putting these sold mortgages into pools, and selling them as packaged investments. Thanks to the repeal of Glass Stegal, this was now a possibility. And so the securitized investment was born and people operating on the Street were very happy. The problem was that more fuel was needed for the fire, ie more mortgages to sell. So banks began devising all sorts of “exotic” mortgage products to get people into houses and home loans, that frankly should never had them. Zero down payments, weird payment schemes, ARMs etc… drove these products, home ownership got to an all time high, but that ownership came at a price.

The Street kept betting on these mortgages, you see as the home values went up, the value of the colaterized notes increased and banks like Goldman Sachs, and others, made out like bandits. The banks were making hand over fist in the processing fees and selling the mortgages at a premium and loan officers working on commission were buying beach house. Banks had the attitude that “hey we know a bunch of these are going to go bad eventually but we will make it up in all these profits”.

Much like anything else based on hot air and speculation, the bubble had to burst at some point. When the economy slowed down in 2008 (which it does about every 7 or 8 years regardless of who is in office) People began losing jobs, unlike in past recessions, though many more people had mortgages on their backs, they could no longer afford, and the defaults began coming in.

The result set off a chain reaction, as suddenly foreclosures rose, home values dropped and bank portfolios collapsed. The securitized funds imploded and all those who heavily bet on them, lost their shirts.

Banks were suddenly at risk and a few actually went under. Panic ensued and suddenly banks had to greatly tighten their credit, which made it difficult for small business to continue to get operating loans, the ripple effect of all this magnified by just how interconnected everything had become.

The above is the very short and shallow version, there is much more to the story, but I think I covered the basics.

Governments cannot “fix” the economy.. The best that government can do is to create a friendly environment for investment and expansion. The Economy is an article of faith, people have to be confident that their investments will yield results and until that confidence is restored; our economy will continue to struggle.

[John25]

Very good explanation, Tim. I agree completely with the statement that government cannot fix economies. Presidents win or lose election due to the economy...while they don't have much control over it.

Originally Posted by Timgt5

You ask a great question and no you are not at all stupid for asking it.

Governments cannot “fix” the economy.. The best that government can do is to create a friendly environment for investment and expansion. The Economy is an article of faith, people have to be confident that their investments will yield results and until that confidence is restored; our economy will continue to struggle.

[madisgram]

the federal reserve plays a big part in this recent fiasco, imho. plus we can't be importing everything and then not have unemployment thru the roof. simple but true. and no not a stupid question at all. i wish more ppl in the U.S. were asking this question rather than being the real silent majority.

[ramsey12]

My opinion is government played a BIG role in this economic mess.

#1 They went off the gold standard so our dollars are becoming more and more worthless
#2 There economic policy is one of big deficits & inflation
#3 The government "Regulators" are a joke - Rated Freddie & Fanny, and all the "Too Big To Fail" companies AA or AAA
#4 Are in favor of the federal reserve and low interest rates which provided the alcohol and all the wall street thugs got drunk on greed.
If you really want to understand, I'd suggest listening to Peter Schiff's radio show online.

[pgrundy]

The U.S. has been outsourcing industrial work and deregulating the financial industry for 30 years. During the 1950s, the financial industry was less than 10% of Gross Domestic Product. Now it is well over 50% and most of that is the slippery, tricky 'gambling' stuff, not retail banking.

The good paying jobs of the 50s and 60s are overseas now, and the financial industry doesn't provide many good jobs. So right now our economy is kind of falling apart for ordinary people even though Wall Street does fine.

It's going to get worse before it gets better because nobody is doing anything about it, not really. Our government has also gotten unbelievably corrupt. Wall Street basically owns our government. What we want scarcely matters at this point.

[Timgt5]

Originally Posted by pgrundy

The U.S. has been outsourcing industrial work and deregulating the financial industry for 30 years. During the 1950s, the financial industry was less than 10% of Gross Domestic Product. Now it is well over 50% and most of that is the slippery, tricky 'gambling' stuff, not retail banking.

The good paying jobs of the 50s and 60s are overseas now, and the financial industry doesn't provide many good jobs. So right now our economy is kind of falling apart for ordinary people even though Wall Street does fine.

It's going to get worse before it gets better because nobody is doing anything about it, not really. Our government has also gotten unbelievably corrupt. Wall Street basically owns our government. What we want scarcely matters at this point.

I see a lot of this Lou Dobbs anti free trade rhetoric, but I hate to break it to you, but we are never going back to world of the 50's and 60's. Globalization has changed everything.

As for regulations, we have thousands of pages of them. More regulation just blindly applied will make things worse. I am for regulation, but the rules need to be cost effective, and smartly enforced.

While outsourcing has been going on, more jobs have also been created at the same time, in fact very good jobs. As for jobs in the financial industry, there are a lot of them actually. I work for a European investment bank that employees several thousand people in the US and pays them well.

I agree that lobbyists for many interests, Wall Street included, whield too much infuence, but the only way to truly lower that influence is to reduce the size and scope of the federal government. The other is rewrite the tax code to remove the social engineering nonsense out of it and return it back to the original intent the founders designed. Taxes were meant to raise revenue to do those things as enumurated in the constitution, not to modify people's behavior.

The idea of centralized economic planning is idiotic, and I saw how stupid it was first hand in 1985 when I spent two weeks in the USSR.

So how do we return to prosperity?

1). Reinstate Glass Stegal, investment and commercial banks need to be seperated, the repeal of that act in 1999 was a major contributer to the mess we are in now.

2) Eliminate all taxes on labor, investments and income. Create a single consumption tax with a built in exemption for the lowest classes. This single act would create the most massive stimulus in history. Eliminating the corporate income tax alone, would easily make the US the most competative environment in the industrial world and the most attrative place to do business, that means more jobs.

3) Create an audit team to go through every rule and regulation and run a cost-benefits analysis on each one, then immediately rescind any that are out of date or duplicated. This is in fact already mandated by a law passed during the Carter era, that every decade out of date regs were supposed to be removed from the books, it is just that every President since has ignored that law.

3) Block Grant medicare and medicaid back to the states, who are frankly better able to administer these programs than the federal government.

4) Pass a law stating that that the federal government shall consume no more than 20 percent of GDP unless we are in a major military conflict. In times when the Government represented less than 20% of GDP have been the times when society as a whole was the most prosperous.

5) Redesign our education system to work with a post-industrial economy, we must teach our children to think like entreprenuers, not just workers.

6) Get rid of the Federal Reserve. The Constitution assigns Congress with the task of coining and printing money, having an unelected, quasi private organization manipulating the economy is simply putting too much power into the hands of too few, especially those few which are not held accountable to the people.

7) Eliminate all business subsidies. A business should exist because the market says it should, not because the owner has friend in congress. All farm subsidies should be eliminated as well. The vast majority of that money winds up in the hands of multibillion dollar agribusiness, to be paid to pump corn syrup into everything the kids are eating and you know where that leads.

8) Create a sensible energy policy based on realism, not the pie in the blue sky fantasy of groups like the Sierra Club. We need to in the short term develop our fossil fuel reserves here, and in the long term continue to make alternatives cost effective.

[pgrundy]

Wow I never said we should or would go back to the 50s and 60s. I was just trying to describe what I see happening. I agree with you, we can't compete now, we won't be going back to that era. Most working people are in a kind of downward slide right now. That's just what's happening. It's not a political talking point.

One thing I think is unfortunate is the tendency online to frame every discussion as a zero sum game and plug a label on the "other" so as to "win" the "argument". We actually agree on a lot, and I FYI don't much care for Lou Dobbs.

Most of these thoughts came from Kevin Philips recent book Bad Money. It's a good read and I thought he explained it all pretty well. He doesn't think we're going back to the 50s either.

[Mystical Sadhu]

Timgt5 has given worthwhile insights, you can view some short videos making clear what happened in these Charles Ferguson interviews.