Woe Street... er... Wall Street
If you’ve paid any attention to the news in the last twenty-four hours or so, you’ve heard about the collapse of Lehman Brothers, the buyout of Merill Lynch, the problems with AIG and the Dow-Jones Average closing down nearly five-hundred points. These events follow close on the heels of the government bailout of Bear Sterns, Fannie Mae and Freddie Mac. Other notable collapses over the last few months include the failure of IndyMac, and from what I’ve heard, Washington Mutual may also end up having some serious issues.
This is all largely caused by the failure of the sub-prime mortgage market. Gee, who would’ve thought that giving home loans to people who couldn’t afford it, and then kicking their interest rate into the stratosphere after a couple years, could be a problem?
There’s a number of lessons to be learned from this. First, we need more banking regulation and more oversight from the government. Lassiez-faire capitalism does not work. It didn’t work back in 1900, and it doesn’t work now. Government regulation is needed, especially since the FDIC (ie: taxpayers), has to back all the accounts people have with these banks. If the government has to cover the cost of these failures, it needs to have more power to prevent these failures in the first place.
Second, financial institutions need to wise-up. I have no problem with granting home-loans to people who might not have the best credit in the world, but if you’re going to do that, don’t then jack the interest rate up big time! That almost gaurantees people will default and the next thing you know, you’re having foreclosures left and right.
Third, given that the Republicans like to make all sorts of noise about how great they are on the economy and how good it is to have someone with an MBA in the White House, why the hell is this happening on their watch? I note with some interest that the Great Depression also occured during a Republican administration (and, again, with someone who allegedly knew a great deal about the economy at the helm). The economy also wasn’t so hot during the first Bush administration, what with things like the savings and loan scandal and the recession of the early 1990’s. Given that after the last two major economic collapses we had to have a Democratic administartion come along and clean up the mess, perhaps we need that this time, too.
Lasty, it is important to keep in mind that despite these problems both American banks and the stock market tend to be fairly steady in the long-run. Yes, there’s several banks failing, but unless you have more than $100,000 in an account, your money is safe no matter what. If you have more than that in an account, go and quickly break it up into two or more accounts.
And the stock market, while stumbling now, is a great long-term place to store your money. Yeah, there’s risks, but if you have 20 – 40 years before retirement (me: 34 years, since I assume I’ll retire at 70), then you’re probably doing right to have your money there.
Things are getting pretty ugly out there, what with this, and now gas prices going up again thanks to Hurricane Ike. But while nasty this is likely to be temporary, especially if we can restore a Democrat to the White House and get some real reform going on.
September 17, 2008 at 3:02 pm
The worst part of this (from my point of view) is that it doesn’t only affect America. The world’s economies will likely be affected.