The Crisis

There's been a lot of talk of the unprecedented nature of the recession, and all of these pundits (who certainly won't be losing their job) are probably right. Unfortunately, nearly everyone is wrong about how to go about solving it.

Everyone remembers the Dot-Com bubble from the late 90s/early 2000s. Companies were sprouting up everywhere offering home delivery of groceries, the iSmell, or my favorite bust, the CueCat. Financing was seemingly ubiquitous, venture capital flowed throughout Silicon Valley. Of course, we all know how the story ends. Bankruptcies, a declining economy, and well, people realizing how idiotic half these products were (like absolutely everything in SkyMall) caused a rapid collapse of the industry. The bubble popped, as many put it.

The crisis is too complicated to simplify, but I'm going to attempt to address one of the principle problems. The economic downtown originated in the mortgage industry; easy (and careless) lending caused rapid speculation in the market. Much as there were too many CueCat companies out there in the market, there were too many mortgages being laid out. Both political parties have blamed one side, unfortunately neither has come out and blamed it on both. Democrats blame greedy and unscrupulous lenders for pushing mortgages, and Republicans blame the people for signing up for mortgages they couldn´t afford. Both are culpable.

This crisis hit America on Wall Street first and foremost. Most of these mortgages were sliced up, repacked, and sold to other banks. (I´m not sure how lots of very risky assets is much better than a few, but I guess simple probability less likely you'll lose all of your money) The crisis then spread throught America´s financial system, causing various bank collapses, most notably Lehman Brothers and WaMu. With a lack of liquidity and a general economic downturn (damn business cycles) this plunged the US into a recession.

One of my chief complaints about all the plans to fix the housing sector are this; there were too many CueCats in the market, and there was too much speculation in this bubble. All plans thus far have tried to maintain housing values, far above what they should be! Everyone in the political sphere has seemingly accepted this, after all, no one wants the values to plummet. But this is an insanely idiotic way to get out of this problem, one that will do nothing but haunt the market for decades to come. If the value of a good is too high due to speculation, it must fall to its market value. Artificially maintaining the price of a home/mortgage will help no one.