The Financial Crisis

Humans are panicky creatures. The media has always played on this fundamental truth and they're surely doing that now with the financial crisis, and yes it is a financial crisis. However, in my opinion, the other pillars of our economy are doing just fine. The economy, just like the climate, goes in cycles and we are simply in a lower part of the cycle.

It should be known though that it wasn't capitalism that has failed us here, rather it was corporatism (aka crony capitalism). Freddy Mac and Fannie Mae are known as government sponsored entities (GSE's). These are quasi-socialist organizations that were essentially creating their own capital and were running amok with bad mortgage deals. Fannie Mae was set up in the 1930's under FDR as a way to add liquidity to the mortgage market and became a legal monopoly. Freddie Mac came in 1970 for the same general purpose. Both showed signs of needing reform for the past 20 years as more and more lower income people were given "cheap" loans (that many have since defaulted on). Now, after years of mishandling, we the taxpayer get to bail these behemoths out.

I'm a firm capitalist and it is extremely alarming to see the nationalization of our mortgage and financial markets as if this was 1950's Cuba. In fact, we haven't had a capitalist economy since before FDR. However, we're now put into a situation where we have to do this bailout to stem off any greater harm. Despite all of this, the optimist in me sees this as a potential opportunity for this country. I have long thought that this crisis is a great opportunity to weed out the truly bad economic influences in our markets. Stronger and more efficient companies will be left standing as a result.

Just yesterday I was thinking that the government could actually make a lot of money off of this deal if the economy rebounds in short order. Well, Andy Kessler of the Wall Street Journal laid this possibility out today. This could actually end up being a good thing. Warren Buffet, who knows a thing or two about economics, showed that he thinks a recovery is inevitable (as it always is in this country) and invested $5 billion into Goldman Sachs.

As for who's to blame. Well, many people. Here's a video laying out some context.