It’s the economists, stupid

February 3, 2009

I don’t claim to know much about economics. I actually know very little about the incredibly complicated world of the global market economy. However, many of the contributing factors of the current economic crisis are very simple: stupid practices
and stupid decisions. 

For example, take the subprime mortgage crisis. This is a perfect case where an outcome could have been seen by almost anyone who had taken a high school course in economics. According to The Telegraph, during the U.S. housing boom, lenders began giving “No Income No Assets loans,” or NINA loans, which is jargon for giving people enormously high loans without any proof they had the finances to afford them. No verification. No background checks. Someone could virtually walk in with a salary of $30,000, write a number far greater than that in the box marked current salary and walk away with a loan they would never be able to afford.

Lending money, often hundreds of thousands of dollars, to people who may not have the means to pay it back is obviously a bad banking practice. Why would lenders across the country engage in this practice? For one, money was to be made, lots of it. A single sales manager could make $70,000 to $100,000 a month, according to Glen Pizzolorusso in This American Life. Another reason to grab so many high risk loans was their quick passoff to Wall Street. 

Wall Street then divvied these risky loans into mortgage- backed securities. These securities were given credit ratings according to their risk. Many received AAA ratings-the highest. Why? The precarious mortgage securities were combined with several safe investments, and after redistributing many of the unsafe mortgages with safer ones, the overall result was an investment with a high rating but with many hazardous mortgages lurking underneath the surface. 

The latest blow to the U.S. economy is the federal bailout of Fannie Mae and Freddie Mac. Again, I do not claim to even begin to understand how these companies operate, so I will defer to John Snow, former Secretary of the Treasury. 

“This is potentially extraordinarily costly and was totally avoidable, and it is really regrettable that this, this is a huge failure of American public policy, and it didn’t have to happen,” he said.

Until Fannie Mae and Freddie Mac were bailed out several days ago, they were regular companies. Regular, except for the fact they received “congressional charters, exemptions from state and local taxes and access to Treasury credit lines,” according to The Slate. Simply put, these governmentsponsored enterprises have no incentive to avoid failure. The government bears the burden of all bad decisions, and Fannie and Freddie reap the benefits of all good decisions.

The $200 billion bailout of Fannie and Freddie is necessary. It makes taxpayers nervous, however, when the people in control of an enormous portion of the global money pool seem to throw caution to the wind.

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