Sep 19, 2008

Confusing Economy Explained

I'm a fan of Terrie Gross's program FRESH AIR. I get it free via podcast. She's always got great interviews with artist and writers, politicians and economists. I've learned a lot about the world listening to her show. I know very little about economics and less about Wall Street. But I thought these two episodes are crucial for everyone to hear.

Our Confusing Economy, Explained
(April 3, 2008)
Was Adult Supervision Needed On Wall Street (September 17, 2008)

If you don't understand how we've gotten into this horrible financial state, it's not merely because of the people who took out sub-prime mortgages. It's because of Wall Street (creating risky investment products to sell those mortgages) and the Congress that abetted them.

In December, 2000, the Republican Congress passed a bill in the dead of night which deregulated various new, risky investment products ... by deregulating them, these products could be bought and sold without any accounting ledger. Take for example these sub prime mortgages. They bundled thousands of mortgages together, got them rated by bond rating companies (who are paid to rate them well, so it's kind of a conflict of interest) and then sold them in a new product called a "structured investment." hey're structured like an iceberg. the small top of the investment looks good, so it gets an A Rating. But there's a whole behemoth of danger below the surface. Here's a detailed look at Moody Bond raters and the subprime meltdown. Then there are "Credit Default Swaps," which are a kind of very risky insurance ... But if you called it insurance, it would have to be regulated -- you know, require oversight and accountability -- so they called them something else, and Congress got the bill passed in the middle of the night so no one sane would protest. That would suggests they knew it was risky and might not pass muster in the light of day.

The Republican fiscal philosophy supports a free market economy, unfettered by government control. It has worked well for the American economy in some respects. But our current problem lies in not enough oversight. For the past 8 years, these ridiculously risky products have been sold -- privately, deregulated, no bookkeeping, no paper trail. The government would love to have a spreadsheet to find out how much money changed hands, how much was lost .... but they are private securities, and there is no paper trail. And now we have what we have on Wall Street. The government had to bail out AIG or we'd be facing a Depression.

Privatized profit, socialized debt. Private wheeler dealers reaped the early profits. Now the society is going to pay for it, in taxes (But not big companies or the rich; they get loopholes. Just the average Joe). That's how our government is structured today.

I'm not naive. I don't think massive government is the answer. I don't believe we can create a program for every issue known to man, then demand the government pay for it. I don't believe in taking money from hard-working people and giving it to slackers who don't want to work. But it seems like a lot of people on wall street made money at our expense.

I highly recommend Wednesday's podcast, still free and available on iTunes; as well as the archive of April 3. It will be an education. A terrifying and fascinating horror story.

Our Confusing Economy, Explained
(April 3, 2008)
Was Adult Supervision Needed On Wall Street (September 17, 2008)


Lisa Milton said...

Thank you for including these links. I've been trying to decipher what's going on over the past few days, and it's been really disheartening.

Thanks again.

Ruth said...

Hi, Susan,
This blog is missing some detail, as would I, if I were writing about economics in a world of Google. You write that Republican fiscal policy supports no government controls. That's an oversimplification. Here's my own paraphrase of an article which I'll link: In fact, not only did deregulation of some things HELP the current fiscal crisis - all the eggs are not in the same basket - but in 2005-6 Democrats voted down a strong reform bill prohibiting Fanny and Freddy from "holding portfolios" and giving them more oversight. Rep's FOR regulation, Dem's against. It would have helped the current crisis immensely.

Susan Isaacs said...

Ruth, thank you for that info! I am still watching and listening with great horror at the thought of passing this bill so quickly without really setting some things into place. Like making sure no CEOs of these businesses get more than $300K a year. they're now making mid eight figures. Yes, 20 million a year. That has to stop.

But thank you for this info. Definitely listen to Michael Greenberger!

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