June 25, 2017

What Really Caused the Financial Bailout Crisis of 2008?

There are a lot of people asking about the financial crisis currently going on.  Here are some of the things I believe are going on.

Why is this a financial crisis?

There are 3 main reasons that make this an actual, not imaginary, crisis.

  1. The housing market is going to drop even more, which reduces growth.  EFFECTS: Reduced employment, increased unemployment costs, reduced tax revenue needed to run government services, and job losses.
  2. There is significant risk that our government could have its credit rating reduced, which causes all kinds of problems.  EFFECTS: Increased inflation because our currency is devalued, reduced investment from other countries, and increased cost of imports because our dollar will buy less.
  3. Our federal budget deficit is going to increase because of more debt, higher rates, and reduced tax revenue.  EFFECTS: Fewer government services, more taxes, less trust in our economy, and reduced foreign investment.

If we KNEW about the problems and the risk, why didn’t it get fixed?

Too many people were benefiting from the bad policy. Everybody was running toward a cliff while stuffing cash in their pockets.  Everybody hoped that the ride would not end – even though people much smarter than me predicted the bubble bursting.  With the housing bubble expanding, even if you bought a home you could not afford, you could turn around and sell it at a profit.  Banks profited.  Real estate profited.  Investors profited.  Housing sector manufacturers profited.  However, a lot of low to middle income people were hurt as the bubble expansion started to slow – they could not sell their homes and they could not pay their debt.  Now, most everybody is going to hurt.

What was the root cause of the "need" for a bailout?

A policy that was a good idea poorly implemented: affordable housing. Excessive debt and risk came from the mortgages and related mortgage instruments that were only risky if housing prices declined.  The bubble burst, housing prices dropped, and many people just walked away from their loans.  Plus, these same financial organizations got tied into having bad debt and not enough cash on hand.  Because they did not have enough cash, loans dried up in other areas which threatened other sectors and industries.

How did the problem develop?

This video on YouTube does a fantastic job of explaining the legislation and policies that brought the U.S. to this major problem, step by step.  NOTE: I believe it is a bit too easy on the Republican side (the problem IS from both sides).

Who is offering alternative solutions?

  • Dave Ramsey , the get-out-of-debt guy, is recommending an alternative that makes sense.
  • Ron Paul , the Libertarian/Republican, is recommending dramatic government cost cutting.
  • Jeffrey A. Miron, a senior lecturer in economics at Harvard University, wrote an article on an alternative to the bailout that gets people excited.

Why are the American people so unhappy about this?

  • Disgust with fear mongering and a feeling of being pressured into something they do not want.
  • Fear of a government that controls too much and has no restrictions.
  • Distrust of Congress AND the administration prevents citizens from trusting thousands of dollars of their tax money with a bailout plan.
  • Political posturing instead of fixing the problem.
  • Perception that the bailout is geared toward helping the rich executives on Wall Street.
  • The problem should have already been fixed.

What can I do?

  • Get rid of debt.
  • Cut your spending.
  • Take a Dave Ramsey class (or read the Total Money Makeover book) and get on a tight budget for tight times.
  • Contact your congressional representation and tell them what you think.
  • Consider voting for somebody else.  Challengers look a bit more attractive than the incumbents now.

How do we get through this??  Is it going to get worse?? Leave a comment and let me know your thoughts.  (NOTE: Overly partisan finger-pointing to any single party affiliation will be deleted. The fault lies with the legislative & executive branches of multiple administrations, Wall Street, and several other entities, not just a single party.

Comments

  1. I read an email yesterday that suggested an alternative that I liked. It proposed taking the bailout money, dividing it among tax payers and giving the bailout money to them. Individual amounts would equal about $225,000 per person. If the tax payers are going to foot the bill then why not give them the money? They can pay off their home loan (fix the real estate problem), put it in savings (fix the banking problem) and spend it on 98″ plasma TVs (boost the economy).

    Something to think about.

  2. @jason: I could use a cool quarter million & I do need a 98″ TV to watch Eureka and Big Spender. My major concern is that the government would be giving us the money we gave them (taxes), the money we are going to give them (future taxes), the money to finance the debt load, and the money to handle the money. I’m guessing that a $225k check would cost us about $500k.

  3. @jason: In theory $700bn spread between each tax payer means a substantial amount, however, if that amount wasn’t injected into the banks, inflation will cause $225k cheque to be worthless.

  4. Clyde Maxey says:

    In order to get out of debt one needs to quit spending for anything that is absolutely unnecessary. That includes cities, counties,states, fed and individuals. The present policies is literally killing our country. Get off the “I Want” credit cards and start a new policy which is very simple. IF I DO NOT HAVE THE CASH, I DO NOT BUY.

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