With the failures of Freddie, Fannie, and now AIG, we have seen an earth-shaking failure of free-market economics. While the market would eventually correct itself, and though that should be allowed to happen, it had to be checked for fear of a complete US ecomomic collapse, which, according to a number of economists and members of Congress, very nearly happened this week! So instead of a free market, we have a government bail-out. Those who profited from the market go their merry way, and the taxpayer is left to absord the damage - close to 1 trillion dollars, and approximately the cost of yet another Iraq war. And we may not be done yet.
Fannie and Freddie weren't totally privatized institutions.
But remember, the financial industry is very unique in a free-market economic society, because if a big financial institution collapses, or a bank, the government has to "bailout" the customer's money in said institution, to keep the economy itself from completely reeling and going into an actual depression.
If Nike shoes collapses, no government bailouts. If Mattel collapses, no bailouts. If Coca-Cola collapses, no bailouts. If any of these collapse, will a lot of folks lose their jobs? Yes. But will the financial system collapse? Very unlikely. The worst the customers of these companies get is the fact that the company is now gone.
But if a major bank or insurance company collapses, it's different, because in addition to the institution itself collapsing, the customers themselves lose all their money. This leads to runs on the banking system, panic, etc...the Federal Reserve system exists to keep the financial system solvent in times of such crises.
I'm not quite sure if "bailout" is the correct word for these institutions though; I don't think the government is actualy bailing them out per se, more just securing the money the institutions held.
If you owned stock in AIG, I believe it's gone. Back when Bear Sterns collapsed, if you owned stock in it, it was gone. But the money of the customers is protected.
I'm not totally sure HOW this works though, nor does the media I think; there is a lot of faulty information out there:
For example: they say, "Bear Sterns was bailed out," but obviously Bear Sterns itself is history.
Then you read or hear, "Lehman Brothers will not be bailed out," yet the customers of Lehman Brothers, their money is fine. The institution itself is failing.
But that is the same thing that happened with Bear Sterns...so it's very confusing.
And a special thanks to John McCain who was instrumental in creating this disaster with his long history as Mr Deregulator. He wanted to bring change to America. Well, it looks like he succeeded: Change may be the only thing left in your pockets after our adventure with McCain's deregulation and Republican control of the government.
I have to strongly disagree with this. John McCain saw this coming from a while back, and said Fannie and Freddie needed more oversight through the Federal Housing Enterprise Regulatory Reform Act of 2005, which was shot down both by Republicans and Democrats.
Also, to call these institutions that have collapsed "de-regulated" is really kind of stretching it. They were very regulated, but by foolish, ill thought out and inneffective regulation.
If you notice, most of the hedge funds, which are virtually unregulated, seem to be doing fine (KNOCK ON WOOD, hopefully I won't have to eat my words in the coming days, weeks, or months).
What's very ironic is that some, such as Bill Gross, founder of PIMCO, have criticized hedge funds as being "unregulated banks" (
http://blogs.wsj.com/economics/2007/12/20/gross-economy-in-recession-hedge-funds-a-con/). Yet we have thus far seen many of the very regulated investment banks collapse, while the "unregulated" banks seem to be doing okay for the moment.
But to just blame this crises on "deregulation" I think isn't right. For one thing, because the economy and the financial markets didn't perform very well back with heavy regulation either.
And this seems to be one problem: people either are for virtually no regulation of the financial markets, which wouldn't work, because the financial markets used to be crazy prior to any regulation, and others who argue for complete and total oversight of the financial markets, as if the government can somehow know what it's doing with this regulating when it can't handle its own finances properly, and when historically too much regulation also seems to be bad.
There is a fine middle-ground.
Remember, being for more government or being for less government are sometimes neither the answer; what we need right now is GOOD government.
The blame for this crises is on the following, I'd say: investment banks, homeowners, lenders, credit rating agencies, underwriters, investors, real-estate developers, poorly thought-out regulation, and the Federal Reserve leaving interest rates too low, which in hindsight we see was a bad thing.
To just blame one particular political party or person isn't right. Remember, bubbles occur. Under Ronald Reagan, we saw the 1987 stock market crash in which the markets lost around 23% that day; yet under Bill Clinton, we saw the stock market crash in 2000, losing over 50%. Were either of these the faults of those Presidents? Of course not.
Under President Bush, we saw the housing bubble occur; it grew and grew, then popped, unfortunately real-estate crash is a far harder blow to an economy than a stock market crash. People don't use stocks as collateral for things like they do their homes.
So is this the end of an era? Have the banking, insurance, and finance markets proven too dangerous to be allowed to operate freely? And what does this say about free-market theory generally?
Banking and insurance don't operate freely.
And what it shows is that the free-market is working: that if you lie, cheat, steal, cook the books, whatever, eventually the market gives you the boot; it kicks out the garbage.
Unfortunately, with financial institutions, they're a special exception who must have their customers' money protected.
The market is doing a very painful correction.
I don't think it's natural that there needs to be huge, economic collapses in certain industries now and then. Who ever heard of other areas of a complete collapse in something being necessary to progress? This kind of stuff has happened before and you'd think people would learn that certain rules and regulations on the markets are necessary to prevent these things from occurring.
Well collapses aren't necessary to progress, they're just a natural thing that seems to happen once in awhile.
People do understand about rules and regulations, but the problem is that the regulators themselves oftentimes don't know what they're doing.
