Carried Away- The Thexton Version of the Causes of the Recession

This economic crisis is our own fault. We could go around for days blaming it on the banks, Regan, the housing bubble, the government, etc. but that wouldn't be fair. We as Americans have been so privileged and have usually been at the top of whatever we do and we are used to being able to get what we want. Whether we admit it or not, we are greedy. We always want more; the newest model, the prettiest, the 'coolest' of whatever it is that we are buying. Do we really need all of this? No. As we learned in science class, the three things needed for survival are: food, water, shelter. We have gotten greedy and tried to buy everything that we wanted and made stupid decisions in the process. These stupid decisions I am referring to involve buying things (houses especially) that we knew we did not have enough money or credit to buy. Also, we took out loans of heinous amounts and couldn’t pay them back, which left banks with no money to lend out, which was a big part of the bank failures. We didn’t know any better. We wanted to get what we wanted when we wanted but didn’t know how it would affect us in the long run or the economy because we didn’t know how the economy worked. Anna Quindlen put it nicely when she said, "you can't proceed knowledgeably, in terms of personal finance or political judgment, in an area you don't really know much about."

The current economic situation is deeper than a recession but not deep enough to be classified as a depression, or a "repression" as Anna Quindlen put it. The unemployment rate is at 8.5%, the inflation rate is 0.24% for Feb. '09, and the GDP growth rate was -6.3% for the 4th Q 2008. None of these numbers are close to what they should be for a "3-way happy place" or equilibrium. The targeted range for unemployment is somewhere between 4.5% and 5.5%, the ideal range for inflation is 1% - 2%, and the intended range for GDP growth is between 2% and 4%. Let's start with the banks and housing bubble, not because it is the biggest cause, but because the media gives it the most attention. We know that those who work for the media are most likely NOT economists but we still believe them when they say, "oh this is all the banks' fault…oh this crisis is all because of Bush (or Obama)…oh this economy is going down the drains because of x, y, and z…" Why do we believe whatever bull crap the media gives us? It’s because we don’t know enough about the situation ourselves... but on to the banks and housing market. You could say it started with Regan and his supply-side economics and deregulation of the private sector. Both of these tactics could have been very successful in the short and long run if only there had been perfect information and transparency. The deregulation led to excessive freedom and power in the banking system and housing market. "Arrogant traders around the world [and in local banks] were playing a high-stakes game they didn’t understand" and the people they were dealing with, who didn't understand either, were hurt. Banks gave out loans to people who couldn't afford them and they weren't paid back. This led to people buying houses that they knew they couldn’t afford and taking out more loans to pay the mortgages. This leads to the mortgage-backed security (MBS) issue, where banks packaged multiple mortgages up, sold them to higher risk investors and the investors then put them into the stock market and/or hedge funds. The FED kept interest rates at about 1% during this bubble, and the banks kept buying MBSs because they thought they were going to keep making boatloads of money. When the markets went down, the MBSs went down with them. This meant that banks didn't get that money back and that the average American with too big a mortgage from too big a house on his plate couldn't pay the bank back. Banks then proceeded to give sub-prime loans with adjustable mortgages to people with faulty loans, but once the interest rate sky-rocketed, "Joe-the-Plumber" could no longer pay his loans back. Homes went into foreclosure because the money people had invested in the stock market was ‘gone’, their adjustable interest rates went way up, and the banks were out of loanable funds because of the above reasons and more. This was the bubble bursting which led to tons of foreclosures and to the failure of banks for reasons above as well.

Simon Johnson, in his essay "The Quiet Coup," uses the metaphor of an oligarchy to explain who is at fault. "An oligarchy takes control of the nation. The oligarchs get carried away and build an empire on mountains of debt. The whole thing comes crashing down." In our current situation, a case could be made that the oligarchs were those at the very top of the ladder, the elites, the members of Wall Street who got rich wasting the average American’s money. Johnson says that when the market started to collapse, "the elites did what all elites do…they took care of their own." They were selfish and greedy and only saved what they needed to in order to return to their previous spending and splurging habits. Now this is not to say that they are the only ones to blame, because we are not placing blame here. The "average Americans" (i.e. those not in the top 1%-5% of the spectrum in this case) made some stupid decisions as well. They either chose to not educate themselves on this matter or were never given the opportunity (ragging on the education system to come in a later segment). But if you don't know anything about what you're doing, you’re probably going to end up doing something stupid (see above paragraphs for unpaid loans).