The Current Financial Crisis

HEADLINES:    Venezuela Moves to Nationalize its Oil Industry.   Chavez Orders Nationalization of Banco de Venezuela.      Venezuela Nationalizes Telecommunications Company. 

HEADLINES:    Government Bails Out Bear Stearns.    Federal Government Assumes Control of Fannie Mae and Freddie Mac.   U.S. to Take Over AIG in $85 Billion Bailout.  

HEADLINES:    Obama Blames Bush for Financial Crisis.    McCain and Obama Both Call for More Regulation. 

Are you nervous yet?    If not, you should be.    For me, I am tempted to cancel all of my newspaper and magazine subscriptions, give away my radios and television sets, quit answering the phone, and try to live out my remaining days in peace and tranquility.   If I thought I could, I would.   But I don’t know how I could watch Kentucky basketball games without a television set. 

There are major differences between what is going on in Venezuela and what is going on in the United States, but the end result is the same.   Both governments are taking on major roles in running what used to be private businesses. 

Although I am not smart enough to understand and analyze the current financial crisis, I will provide you with a few observations and predictions.   My first observation is that politicians are doing what they always do—looking for someone else to blame, preferably a member of the opposite political party.    I have seen no indication that we have statesmen who are coming together in an effort to find a bipartisan solution to the problems facing the country.   Instead, our politicians are using a crisis in an effort to grab more power for themselves. 

Even though I hate to admit it, I think the federal government is doing what it needs to do at this time to keep the current financial crisis from getting worse.   I have a great deal of confidence in Treasury Secretary Hank Paulson.   We are very fortunate to have a Treasury Secretary who understands the financial markets.   Secretary Paulson is not a politician.   I believe he is doing what he thinks is best for the country.   I also think the Republicans would be screaming bloody murder if the federal government was doing the same thing with a Democrat in the White House. 

It will take years for economists and financial experts to analyze the causes of the current financial crisis.   When the final books are written, I think most of the blame will be directed to the Federal Reserve Board, the Congress, and greed on the part of Wall Street and individuals like you and me.   In hindsight, I believe the Federal Reserve Board, which is not controlled by the President, kept interest rates too low for too long in an effort to stimulate the economy and keep the economy from falling into a recession after 9/11.   The result was easy money.   Financial firms were able to borrow money at a low cost and lend it to others at a higher rate.   They took on too much debt in order to make more loans, and the result was a feeding frenzy that resulted in an unhealthy acceleration in the prices of assets, especially real estate.    Lenders and individuals assumed there was little risk because prices would always go up. 

Congress also will get a large share of the blame.   Congress propped up Fannie Mae and Freddie Mac for years.    Congress also put pressure on financial institutions to make more mortgage loans so that everyone could own his or her own home.    This may have been good politics, but financial institutions were pressured to make mortgage loans to people who could not afford them, and they succumbed to the pressure and for a while made money doing so.    Finally, Wall Street could not resist the temptation to make as much money as possible, and individuals could not resist the temptation to buy things they could not afford as long as they were able to do so with other people’s money. 

Where do we go from here?    It is inevitable that the next President and the next Congress, regardless of who is in control, will do what they always do.   They will overreact and over-regulate, and the end result will be that the government will be involved in controlling even more aspects of the economy.   If you like having the government involved in all aspects of the economy, then you should be very happy now.