Financial Meltdown

I remember a time when the term "voodoo economics" was applied to Reagan's economic policy of tax reductions for the wealthy while running the largest budget deficits & trade deficits America had experienced. We are now witnessing the consequences of G W Bush's "woo-hoo" economic policy of tax reductions for the wealthy while running even larger budget & trade deficits in completely deregulated financial markets. Since banks earn profits principally through the extension of credit, they have gleefully maximised the extension of credit, bringing into the debt pool many millions which were previously excluded due to their inability to service and repay the debt. This madness was camoflaged through the fiction that the debt was secured by mortgaged property which would rise in value, and the low income borrowers were lured with artificially low "teaser" rates for the initial few years of their miracle mortgages. As these "teaser" rates fell away and the real rates kicked in, the new borrowers were forced into default and foreclosure, the housing bubble burst and rude reality kicked in.

Of course, by this time the financial alchemists at the investment banks had already "packaged" the coal of these boring mortgages into the gold of MBSs (mortgage-backed securities) which they had sold to all and sundry, including pension funds that managed the savings & retirement accounts of the very same low income borrowers that had been played for suckers in the first place. When the housing bubble burst and the suckers were being forced into foreclosure and bankruptcy, free-marketeers objected loudly to public money being used to bail out people from their bad economic decisions. Now that falsity of the bankers' alchemy has been exposed and the lustre of their MBSs has been seen for the fools gold that it actually is, their loud cry is for a bail out of the alchemists in the name of maintaining market stability and avoiding a catastrophic recession.

If public money is to be used to bail out the banks by buying their bad MBS assets at book value (as proposed), then the state should take over ownership of these institutions as would be the case if they were taken over by a private company. The state could then sell off the banks to investors after cleaning up their balance sheets and use the funds generated thereby to provide relief to the suckers who were initially duped by the alchemists. This relief would, in turn and over time, raise the value of the MBSs purchased by the state thereby providing it with the prospect of eventually re-selling them responsibly and thereby recover the public money spent to unravel this mess.

Of course, there remain the issues of punishing the alchemists which had sold coal dressed up as gold in order to line their own individual pockets, and of establishing a proper regulatory framework that can and does effectively police the alchemists. After all, if it is illegal to scam people with Ponzi schemes, it should be illegal to scam them with other types of financial alchemy.