There is a general consensus: the present financial crisis was spurred by the US Fed’s decision to keep interest rates artificially low, which created incentives for investors to find new and, eventually, unorthodox investment opportunities (e.g. mortgages), which created incentives for some companies to circumvent or ignore financial regulations in order to make questionable investment opportunities (e.g. sub-prime mortgages) look safer than they actually were. This encouraged Americans of every stripe to adopt short-term financial practices that any sensible person — ethical or not — could see was unsustainable.
In other words, a bubble grew, a bubble burst, some people made billions, and many will lose billions. Those highest up the on pyramid — ahem, I mean food chain — did the best, those lowest did the worst. Now the Federal government, acting on behalf of the American people, is left holding the bag.
Unfortunately, after putting their heads together, the solution so far has been this: the Fed has created artificially low interest rates and the Federal government is spending trillions of dollars to bail out and prop up the very people and companies that created the mess in the first place.
In effect, the strategy seems to be: let’s create the very same economic conditions we had before, pay to keep those guys and gals in business who exploited those conditions to their own advantage, and, hopefully, this time around, after making billions of dollars last time, they have learned their lesson and everything will work out just fine. In other words, the U.S.’s political and financial leaders are responding to a burst bubble by trying to re-create a bubble and by leaving the foxes in charge of the hen house. Increased regulations may help a little this time around, but the real lesson of the sub-prime / credit default-swap fiasco is the very old lesson that those who are motivated by profit will always be one step ahead of regulators.
So where exactly is all the money coming from to prop up the players in the financial industry who caused the mess in the first place? Who will be paying? Future generations. That’s who. They will be paying off the debts incurred over the last few years for decades, if not for generations.
Let me try to crystalize what’s happening here: it’s as if a member of your household, stripped and sold everything valuable in the house, ran up massive credit card debts, had the party of their lives (and you were only invited at the very end to help clean up), and are now asking you to fix it by paying off their bad debts and your reaction to this is, oh well, I think you guys have learned your lesson, and I don’t want to deal with this either, so how about we commit the fruits of our children and grandchildren’s labour and enterprise to pay for your little party. There, there, now try to be a little more sensible in the future.
Rather than enslaving future generations, perhaps, politicians and financial leaders should be re-thinking a system which gives so much power to so few people to the detriment of everyone. Rather than propping up or taking over the financial system, we should all, I think, be trying to come up with solutions that will allow persons to weather the inevitable economic storms and that also ensures that the people who create and profit from those economic storms bear the full cost — not just the profits. I’ve got no problem with a good house party, so long as those who enjoy it, pay for it, and clean up the mess in the morning.