In theory, the conservative lenders would survive, and the
firms that relied on cash flow instead of debt, or invested in non-exotic
securities, would also live on. In effect, the companies that made the mistakes
would pay for them, while the strong survive. Theoretically, allowing the market
to function should solve the crisis.
But does the theory match reality? Human nature says no. Mass failure of huge
companies causes widespread panic. Stock markets plunge, destroying personal and
business savings. This fear leads to irrational behavior, such as pulling bank
deposits, which leads to more bank failures. The downswing would likely feed
upon itself, and it's not unfathomable that another period similar to the Great
Depression could have been the result. This crisis is that serious. People rely
on government to protect them, and this is the reason behind the extrodinary
steps being taken to alleviate the public's fear.
Who is to Blame for this Mess?
There is plenty of blame to go around here. In order of most aggregious to
least, the top 3 offenders are:
-
Lenders and Investment Banks: These were the folks making loans to
people who could not afford them. Instead of researching creditworthiness and
value of collateral, the dollar signs in their eyes did just the opposite. "You
can afford it! The value of your house will go up, allowing you to refinance!"
"No money down and no documentation required!" "Low payments for the first 3
years!" It looked great for a few years, but when the tide went out, quite a few
were swimming naked. Long term, successful banks have always been conservative
lenders. This mess reiterates that fact.
-
Government Oversight: The government likes to stay out of the market
when things are going well but step in when they are going bad. In effect, this
privatizes profits but socializes losses, and all taxpayers should be furious at
this. Government should play a role by limiting both the wild upside and
downside of pure capitalism. After all, deep depressions always follow
euphoric bubbles. Where was the government oversight when these ridiculous loans
were being made? Preventing this at conception would have been a hell of a lot
cheaper for us taxpayers. Now we foot the bill while the CEO's of Freddie Mac
and Fannie Mae get paid 7 million dollars each. That's failure of oversight.
-
Over-their-head Borrowers: The people that took out loans they
couldn't afford can't escape without blame for this either. When you make a
financial committment, you should be damn sure you can live up to it
(extenuating circumstances aside, of course).
