The Subprime Primer
Jeff Larson
Raul Bonell
http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn
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Jeff Larson
> Are there real chances that the system is not going to
> heal itself? Since later solutions of injecting cash (america,europe)
> seem to trust blindly again with the same thieves...
I guess it depends on what "heal" means. The housing market bubble
corrected itself as markets usually do, so in that sense the housing
market is now "healthier" than it was before when it was artificially
supported by unrealistic expectations that prices would always rise.
The notion that housing prices can actually fall was a much needed
wakeup call to both borrowers and lenders, so hopefully they will be
more responsible in the future. That's healthy.
The spotlight has finally been shown on some of the bizarre financial
games being played by investment banks to cover up their mistakes. I
doubt investment banks will ever be the same, which is healthy.
Insurance companies and clients of investment banks have been burned
badly enough that they will be much more wary and demand more
transparency which is healthy.
People in general now have more of a healthy distrust of the government
and big business.
These should all eventually have positive outcomes, but the lessons
were very, very painful to learn (and are not over).
I don't think the world economy is going to collapse into a global
depression, but it could very well change some aspects of our lives
for a few years.
I have mixed feelings on the "bailout". It is very distasteful to me
philosophically, but you have to recognize that like it or not the
banks and insurance companies are important cogs in the financial
machine and you can't just "fix" them overnight. If they fail,
it will have a rippling effect on the credit markets that will
have many consequences. One example: if people can't get car
loans, then they stop buying cars, GM can't sell cars, GM
loses money, tens of thousands of GM workers lose their jobs.
Unfortunately I think people spend way too much time focusing on
executive compensation which is offensive and easy to understand, but
is really just a round-off error in this whole mess.
We have two choices: 1) Let everything collapse into an even bigger
mess and hopefully rebuild it from scratch into something better.
2) Try to keep some of the financial infrastructure afloat in the
hopes of less collateral damage and try to fix it gradually with
more oversight.
The purist in me likes approach 1, blow up Wall Street and start over.
Let everyone experience enough pain to REALLY understand just how big
a mess this is and the roles ALL of us played in it so it won't happen
again. But I don't think there is enough appreciation for the
consequences of letting the financial system collapse. You're not
just punishing those "fat cat CEO's", you will be punishing millions
of ordinary people whose jobs depend on the stability of businesses.
Approach 2 certainly carries a lot of risk so we may end up with a
collapse anyway. And since substantially the same players are
involved, if it works Americans may just go back to being fat, happy
and complacent and history will repeat itself in a few decades.
It's a tough decision, I'm glad I'm not the next president :-)
Jeff