Preventing an Economic Meltdown

When I saw some of the news clips and read some of the accounts of Congress grilling the Goldman Sachs executives, I was struck by the irony of the situation. Below are the steps to the national/global financial meltdown:

1 – Congress and the President encourage expanded home ownership via the Community Reinvestment Act
2 – Banks are pressured by government to make loans to many people who can’t afford homes
3 – Fannie Mae and Freddie Mac buy these risky loans
4 – Wall Street firms then buy the risky loans in huge deals and repackage them into investment opportunities
5 – Rating companies rate these new opportunities as a good investment
6 – Insurance companies insure these new opportunities
7 – Wall Street firms sell these repackaged risky loans as good investments
8 – Housing prices collapse, banks foreclose on homes, the repackaged risky loan investments go south and the economy has a meltdown
9 – Congress and the President borrow money by selling Treasury bonds to bailout Wall Street and insurance companies
10 – Congress and the President chastise Wall Street and the insurance companies for the meltdown and unscrupulous practices

In each of the first 7 steps, there was an opportunity to avert the meltdown.

1 – Congress and the President should not have pressured banks to make loans to people who could not afford them
2 -Banks should not have made the loans and people should not have borrowed money
3 – Fannie Mae and Freddie Mac should not have bought these risky loans from the banks
4 – Wall Street should not have bought these loans from Fannie Mae and Freddie Mac
5 – The rating companies should have rated them as risky
6 – Insurance companies should not have insured them
7 – Wall Street should not have sold the risky loans

The economic meltdown would not have occurred if ANYONE in the 7 steps had refused to participate in this debacle! That would have broken the chain, broken the process.

This week the culprit in step 1 (our government) is grilling the culprit in step 7 (Wall Street). Certainly Wall Street deserves to be grilled. Certainly Wall Street should apologize. Certainly some changes are necessary in enforcement of current regulations or some new regulations need to be enacted.

But who grills the government? We do. We the people. We the voters. We grill the government and then decide if they should be elected again. I was always taught if you want to fix a problem start at the source and follow the process. Let’s not forget to start at the beginning.

Wouldn’t it be great if the leaders of our government apologized for their role in this debacle? I might even vote for someone who has the guts to apologize.

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One Response to Preventing an Economic Meltdown

  1. pie254 says:

    Your analysis about the housing debacle is on point.
    The reason Goldman Sachs execs were grilled this week, is in my opinion, because of another debacle that they have created, that has taken international proportions, and will soon start to affect the US economy.
    Goldman Sachs ‘helped’ Greece to repackage their government debt as off-balance currency options, allowing Greece to become a part of the Eurozone, by misleading European authorities that were screening candidates for the Eurozone. GS only wanted a fee of several billion dollars.
    A month ago, unnoticed in US media, France, Germany and Spain refused to attend the Green Conference in Washington, because of this. After some negotiating, did. The week after they attended, the SEC goes after GS. And, how ironic, they pull a French investment banker out of the GS hat.

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