> Besides the obvious "greed" (which is a constant anyway and therefore is not a helpful answer), why did the lending and credit situation spiral out of control?
> Subprime mortgages were possibly at the heart of the situation, but the real estate market is (relatively speaking) only a small part of the economy. How did this fan out into a fiasco involving trillions of dollars and affecting the entire economy?
> Bradd asserts (rightly I believe) that this is no longer Adam Smith's economic model. (a) How does it differ? (b) Are solutions failing because the so-called experts are applying antiquated principles to a new and unprecedented situation?
> Government regulation is met with cries of socialism, whereas deregulation (or neglect of the regulation that does exist) has received much of the blame for the current crisis. Who's right? Is there a viable compromise?
> What is the outlook, in your opinion? The "expert" soothsayers are all over the map, ranging from the optimists predicting a leveling out fairly soon followed by a dramatic upturn to the pessimists predicting a dismal Depressiion-like economy of long duration – and everything in between.
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Rich Turner (The Curmudgeon Himself)

I don’t think anyone has really learned a lesson from this, at least not yet. The government has given corporate America a “get out of jail free” card, and if their bailout works, it will be similar to how a parent who gives a kid everything he asks for actually turns out to be hurting that kid. The government is showing favoritism. The favorite child is “big money” and while the bailout is supposed to help the victimized middle and lower classes, I don’t know how much of it will reach that far.

If the bailout doesn’t work, it will be painful but it might be better overall for America to feel the pain of not being on top. Not that I want to be stressed and poor and bitter, but our reliance on government contradicts our motto of freedom. A large problem with Americans is we have come to expect everything; we really have no reason to fear failure. If times are tough, get welfare. No need to save money because Medicaid and social security will be there to help pay the bills. Can’t afford cable? Just steal a car; they have free cable in prison. The “consequences” of failure are individual bailouts all over the country.

Don’t get me wrong, these programs do have their place. That is not my issue. My issue is that we have come to rely on them. Americans don’t have to take care of themselves if they don’t want to.

Example: A coworker of mine is receiving food stamps and welfare for his family. He has a pregnant wife and they already have two children. Both adults work fulltime (she is not working right now; she has been told to stay in bed). Because their son’s school was rated a “D” school, they were able to move him to the school of their choice. They chose a private school and the tuition is paid for by the state of Florida. He is taking days off work without pay so that they can claim a lower income. He does not see anything wrong with this.

Admittedly, the company I work for does not offer extravagant (or even satisfying) raises, but he makes enough to afford to eat out for lunch several times a week and he is hoping to purchase a house within the year. In other words, they are not struggling. Yet they are happy to accept welfare and don’t think twice about where that money comes from—even when I said to him, “I am paying for your son to go to private school.” To them it is free money, there to be taken advantage of.

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-Ali

I believe it's the latter--deregulation and the neglect of existing regulations. We have a capitalist (free enterprise) economy, and even most of us liberals are in favor of that. Our laws should not be hostile to business, but we should remember that the government of a democratic republic is intended to be of, by, and for the people. Just as we need zoning laws to protect the public, we need regulations to keep financial operations from hurting the public.

Sometimes, when listening to call-in talk-radio shows, I hear callers who tout the virtues of libertarianism. Many, who sound like young men, seem to be concerned mostly with matters dealing with sex, drugs, and motorcycle helmets. Probably many of them don't realize that most wealthy and influential libertarians are concerned more with laissez faire economics. Their goal is to lessen or abolish government regulation of business and economic matters. That might be a worthy goal if all entrepreneurs and business executives were intelligent, responsible, and public-spirited citizens, but too many are not.

Aside from any personal greed, many high-ranking business executives believe that, ethically, their overarching duty is to provide ever-increasing profits to their stockholders. Behaving in a public-spirited way might lower profits and put them at a competitive disadvantage. Good, effectively enforced government regulations are needed. Obviously, the honor system doesn't always work.

Last Edited on 10-Oct-2008 3:05 PM

LBJ's War on Poverty has resulted in several generations of kids growing up to believe that, because they were born, the government owes them a living. Go back another thirty years and we see the beginning of social promotion, which taught children that school took no effort, that it was where their parents sent them to get a magic piece of paper. There are many, many people who don't know anything, who don't care for anyone—they breathe; they are entitled. Those who start with more are entitled to more, and the "lower classes" they prey upon don't matter.

1. It is critical to understand that greed is the cause. To dismiss it as something that is always with us is not only not helpful, it is detrimental to finding a solution. There is only one way to combat greed (or any other crime) and that is to watch the greedy - with vigilance. This translates to strong oversight and tough penalties. For over 20 years, in an environment that erroneously believed that economies are best left to their own devices, greed ran rampant.

The credit and lending spiralled out of control because the greedy in this case were the bankers (and the regulators who were asleep at the switch) who made millions and spread the disease to investment banks until the piper demanded his pay. The mortgages and mortgage-backed securities stopped performing as the mortgage borrowers couldn't make payments (sub-prime loans). With no money coming in, there was no money to lend out. The bankers now refused to lend what they still had because they were afraid they would not get it back. When bankers don't pump money into the economy, the economy stops. No capital for new business, no money for operating expenses, no money for expansion - the whole thing stalls.

2. True, mortgages are not the entire economy, but they, and their derivatives, are the major part of many banks - both at the retail level and the investment level. As stated above, when the banks freeze, it affects the entire economy as explained above.

3a. When Adam Smith developed his economic model, he never dreamed economies could become so huge and transnational. His "invisible hand" theory simply acknowledged that he had no idea WHY economies worked, but that they usually DID work when left alone. He had in mind small firms competing against each other and self-interest would drive these firms to innovate and produce a better product, thereby the consumer being the beneficiary. However, it has never really worked out that way in an industrialized society - see the Trusts of the late 19th century which helped no one but the owners and required big government to stop them. His model worked well for an England 200 years ago with its mom-and-pop economies, but not in modern times. What Smith missed was the tendency of business to consolidate and centralize (monopolize) rewarding the owners and preying upon the consumers. (I'm getting off the track here.)

3b. No one knows if the solutions (the bailouts/rescue plans so far) are failing because there hasn't been enough time to tell. Yesterday (900+ up points on the DOW) was a good sign, but more time is needed. Direct payments to banks should loosen money, and restrictions on banks who participate (eliminate wacky compensation plans and golden parachutes, among others) may work. I don't know.

4. There is no question that weak regulation played a huge pert in the current crisis - probably the key part. The only ones crying socialism are the die-hard right-wingers (Republicans) who don't want government anywhere (hardly) because of their misguided ideology that all government is evil. (They do like government in war, though).

When this is over, good, intelligent regulation will be the norm. (I note here that Alan Greenspan - he of the lower interest rates encouraging the bad lending, and anti-regulation - is an ideologue from his Ayn Rand days when he worshipped at her feet). The book on Greenspan and his role in this is yet to be written. But that can wait until calmer times.

5. The outlook is good and bad. If you're in the stock market, your investments have taken a big hit. It will be a while before they recover - probably years. If you're young, you can handle it. If you're about to retire, it's not good. For the ordinary person, you may be facing foreclosure, loss of a job, or not being able to send Johnny or Susie to college. If you're rich, you're probably already buying at the world-wide fire sale.

Will we get over it? Sure, we got over the Great Depression - after a decade of misery for millions of people (and the rise of Fascism).

I'm not smart enough to predict the future, but I DO know one thing. Economies must be carefully watched. The alternative is to invite the powerful to do their worst because they are driven by greed.

I hope we will have collectively learned something when this is over - that free-wheeling Capitalism is a disaster. To regulate the economy which is such a critical part of everyone's life is NOT socialism - just common sense.

(This has been way too long - many will skip over it or just scan it. But it's impossible to get this into a sound bite, or an easily digested paragraph or two or three. Be glad I didn't get into derivatives or swaps - things even the experts have admitted they don't understand).

I did not mean to belittle the role of greed as being instrumental. I merely asked what besides greed was responsible, parenthetically and cynically noting that greed is a constant. So are murder and theft. That doesn't mean I'm suggesting letting people get away with them. I certainly agree that the only way to keep this dark side of human behavior in check (only a fool would believe that we can eliminate it entirely) is to severely punish those who indulge in it. Alas, this doesn't seem to be happening in the current situation. Many of the culprits – the wheelers and dealers in behind-the-scenes manipulations – have absconded with the loot and won't pay the price. We will – and are.

Some lessons are being learned. However, I am a pessimist about human nature. History abounds with lessons, often the same lesson over and over again. The reason these lessons are repeated is that they are conveniently forgotten. This is especially true when the people who experience the most pain when the hard lesson is delivered are not the ones who need most to learn the lesson.
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Rich Turner (The Curmudgeon Himself)

The replies to your post were interesting. It wouldn't have occurred to me to connect it to LBJ's war on poverty or people getting food stamps. I lack the imagination to think so deeply about things.

Sapninman's comment about the duty of corporate managers to stockholder's profits is incisive - gets to the heart of the matter. Maybe we have to re-think what the purpose of a corporation should be.