The Failings of the US EconomyPosted: October 9, 2008
The economy has taken a big hit recently. Big centralized companies have fallen, and trust of other businesses has fallen. It is a huge correction, or lowering of value of various indexes, that might just cause a depression if nothing happens. So, how would we get out of this mess? The answer is that we start decentralization of the big players of Wall Street so that we don’t witness Freddy May/Fannie Mac type collapses again. The chances of this happening, and the ability of it, are low. It would cause the current recession to extend as we go towards a decentralized system.
First, look upon the systems that brought this failure. Government removed long standing regulation about derivatives. This itself was neutral, as it did not have to be acted upon. Derivatives as not a good economic system to be in, as a derivative is deriving new wealth from an asset without actually changing the asset. Then, the government asked banks to give loans to all people, whether risky or not, and using Freddy & Fanny, said the government would help mitigate the risks of letting poor people buy houses. This move destroyed the actual wealth of housing by lowering risk so far down that anybody could claim a house for themselves.
Look at risk vs. benefit (or greed as others have called it). If an attempt to remove the risk is made, which having subsidized government insurance did, all that is left is benefits. This means that any parties are looking at uphill profits, other than the insuring party. While this sounds benevolent for the government to insure the risk, if the market goes into a downswing, the government will owe a lot of money, and it will fail to keep up on other promises and possibly fail completely. The government was in trouble before the housing market collasped and it could not keep the profits up for the housing sector. Housing loans failed.
This wouldn’t be all that bad for the macro-economy if it wasn’t for housing sector derivatives become a huge sector of the economy too. Derivatives don’t actually produce anything, and instead, rely on other sectors for support. Every once in a while there is a net positive bonus for the public good from this, but if it becomes to high, it becomes negative. Thus, any company that doesn’t produce anything but paper not backed by action will be risky. That risk was also suppose to be mitigated by the government, but the government is broke. They couldn’t do it very well, and instead, bought so they could sell various companies like AIG and Bear Sterns. Others went into bankruptcy.
The bailout was a rushed and stupid plan. The government is broke, so we are going to give you money we don’t have so that you have no risk? What is that going to do, but reward those who did bad, and hurt those who did good? I won’t say much about that, as you can find out why that sucked on other websites. Just watch out for hyperinflation.
Cause and effect can create terrible effects can’t they? The markets lived by looking at false risk. That false risk is now gone to show the true risk, and it’s close to 100% of damaging everybody. Win-Win is possible in many situations, but only if the risk is small enough. This one has risk so high, the guarenteed result is lose-lose.
And what happens if a big company fails? Usually a recession occurs, or it gets worse. Many big companies have failed, and our economy could collaspe from this. If it does, it should teach a very sound lesson. Centralized systems will still fail. The will fail bigger and harder than you want though, as everybody will be effected. It’s one reason that anti-trust lawsuits should be taken carefully.
Instead, an interconnected decentralized network (say no company taking more than 10% of the national or global market share) would function better, as if one company falls, all of the other companies should take an equal, but small hit, and the economy should funtion without them. It’s how the internet works. If one node falls, another one can take the data and send it to the node that processes the data.
Risk will always be here. You can’t escape it. So, mitigate the risk. Expect failures, and downturns. Understand that if your company is too big to fail, it should be too big to exist. Don’t just merge small companies. Split large companies. Interact with the markets, but don’t own it.
Another good step in avoiding these messes is to not go to the government to try to fix markets. Politicians, for the most part, do not know how the markets work. They are also overly hopeful, thinking that if they take in taxes, and pay for services, that they’ll become better. The truth though, is that it’ll deteriate as they create monopolies. They remove freedom of choice for the equation, which throws off the markets. Closed forced markets are bad.
So, to sum it up the market crashed because of these reasons:
- Government Regulations were removed.
- Companies started making derivatives. (This creates huge bubbles)
- Government suggested that companies give risky house loans.
- People were told that their houses would always grow in value, when that just does not make sense.
- Derivatives were made on these housing loans.
- It looked like risk left the housing markets.
- Housing prices became a bubble.
- People stopped buying.
- Houses fell in a correction.
- People used false equity in the bubble, and they lost more than they had.
- Foreclosures occurred on the risky housing loans.
- Derivatives started failing.
- The government tried to bail out the bigger & centralized failing companies.
- The government is and was broke before the crisis.
- The bailout was proposed.
- Risk was bought by the government.
- The real markets did not care.
- In the next few years, those who were successful will pay high taxes, and or hyperinflation.
Lessons to be learned:
- Do not create centralized systems.
- Do not attempt to say an asset is risk-free.
- Prepare for crashes, make sure that none can destroy the economy alone.
- Derivatives create bubbles. Don’t use them.
- When government provides a service, it usually makes things worse, as it removes choice.
- Bailing out (rewarding) bad behavior will only lead to bad behavior.