How politics affects the economy

Interesting political video on the current economic crisis and politics.



Analysis from a collegue, Aron Meadows, Penn State MBA grad:

The economics in the video are fundamentally accurate. Some of their conclusions are a stretch I think.

Yes. Government secured loans created a somewhat artificial market for housing. Any time you reward risk-taking, people are going to do it. Yes it contributed, but no, it is not the sole cause of the collapse of the housing market. First, the vast majority of loans are not sub-prime and so the argument kind of disintigrate right there..

But here is a more intuitive argument for you logic minded engineer types:

1. Did the presence of sub-prime loans (pushed by democrats) in the equities market create the housing bust? Or

2. Did the overstatement of the sub-prime loans value (or understatement of their risk [same thing]) that resulted from vast under-regulation of the banking and financial industries cause the housing bust?

My answer: if the sub-prime loans were sold at a fair expected value based on the actual riskiness of the loan, the number of sub-prime loans would not matter. De-regulation of the lenders allowed an underestimate of risk. This resulted in overstating the value of loans and the subsequent equities made up by them. (SO LENDERS ARE TO BLAME TOO)

Since de-regulation was a conservative agenda lead by economist Volker and President Ronald Reagan (post Carter)...and continued to this day by the most Darwinian capitalists among us, Republicans must share blame.

Also, because the financial institution CEOs, CFOs and COOs are rewarded by stock options, and their stock values are tied directly to the companies asset values, and company asset values are tied directly to the value of THESE RETARDED SECURITIES, THERE WAS NO INCENTIVE TO ACCURATELY REPORT THEIR TRUE VALUE. So de-regulators (republicans) take another hit on the chin and corporate leaders need to face the firing squad with them.

But wait, you may say that because these same CEOs, CFOs, and COOs could get government backing (a democratic program) to carry high risk loans the democrats are to blame. Remember, very few of the equities are sub-prime. Also, only a few of the collapsed giants had government backing...what about Bear Stearns and the others???

Bottom line: The entire industry was CREATING MONEY out of thin air. There was no incentive to change. Not until a very smart financial journalist (cant remember her name) noticed that a few financial giants carried huge ACCOUNTS RECEIVABLE (An asset) balances and yet couldn't seem to turn them into cash, did investors catch on. People got nervous and boom...Aron loses very nice sports car (if not two) in investments.

Last: Blame us. Year over year the materialistic Americans increased their respective standard for success. As a result, we demanded new home construction, 2700 no 3000 no 3200 no 3700 square foot, marble twin vanity bathrooms, slate floors, four bedrooms, an office, monster kitchens (who needs a pizza oven and a $27K stove) and on and on and on... As a result, we not only build too many homes, but abandon old subdivisions. We also simultaneously expect to earn 10% year over year return on the value of our home which is mathematically not sustainable. Never the less, the American idiot (Green day Song) continued to buy and speculate and buy and speculate blah. So we over built AND over extended ourselves to fit in with the over extended Jones' next door. So RETARDED AMERICAN CONSUMERS are to blame to.

To what extent were the dems or republicans in the bank with these processes and unduly influenced by Lobies? I don't know. I do know this, I have not heard a politician yet that I thought new a thing about economics. So I'm not sure why Americans expect them them to fix it. They will just sit it out, pass blame and collect monster retirement.