Let's face it. Barring extreme circumstances, we are screwed. The economy is slumping dramatically and shocking historical events seem to be repeating themselves. For those of you not glued to financial news, here is a simplified version of what has been going on.
Remember way back, when we all thought that the Internet was a new valuable resource into which we should all invest our money? That was actually the start of what economists are now calling the "Housing Bubble," which is one of the largest factors affecting the economy. The dot com crash, the dramatic failure of investments in the booming Internet economy, scared the common man (and woman) into making what they thought would be a stable investment: a house.
A house seemed like a strong stable investment that would grow over time. However, a speculative fever swept the market and home-ownership mania spread throughout the United States. People bought houses way above their means with mortgages that they planned to pay back. However, the rates on the mortgages were not safe. They were not based on credit history, had high default payments, and grew rapidly in interest. Thus, the housing mania that swept the nation quickly became foreclosure mania because the housing market slumped.
This made mortgage rates higher and things got even worse. The banks quickly began losing their investments and their investors began to get nervous. To fix this, the banks began to pool the mortgages together and sold off these supposed "finance-producing" assets to third-party investors. As these pooled mortgages failed, more people lost their homes and the market began to spiral downward. Then, something historic occurred: Bear Stearns Companies, Inc. went under and had to be bailed out by J.P. Morgan Chase and the United States Government. The last time the government had to bail out a financial company of this size was the beginning of the Great Depression.
Now, the government had stepped in before this to help try and fix the economy. Everyone should have received a small amount of money from President Bush's economic stimulus package. In addition, I am sure everyone saw on CNN in the Caf, when the Federal Reserve cut interest rates to help give people incentive to start borrowing money, making investments, and helping the economy. Now, I appreciate the extra $200 I now have in my pocket, and I am sure if I was buying a car I would appreciate not having a lot of interest on the loans. However, the fact is we are in much more trouble than $200 can fix. Even with the billions of dollars from the stimulus package and the fed's cutting interest rates to boost the economy, the fact is that banks and investment companies are writing off billions of dollars more every day. We are slowly heading to, if not already in, recession. Now the Federal Reserve wants to take center stage in fixing the economy by proposing a bill that would greatly expand its power over the American financial market. This was all an incredible over-simplification. I am not an economist; in fact, I am not even in CBA.
2008 Woodie Awards
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