For a long time now, America has been living beyond its means.
In business, it's called leverage. For consumers, its called debt. It amounts to the same thing, just on different scales, and both are to blame for the worst economic crisis since the Great Depression.
The resulting financial meltdown has required a federal bailout risking hundreds of billions of taxpayer dollars and caused the stock market to plunge more than 40 percent. It has paralyzed lending and business activity and decimated, at least temporarily, millions of individual retirement plans and 401ks.
Most experts believe the seeds for the current crisis were sown in the early 1980s, when a trend toward deregulation was designed to unleash the creative energy of capitalism. Its premise was that the market always knows what's best for itself and would be self-regulating, constantly correcting on a path toward perfect efficiency.
But unintended consequences bubbled beneath the surface. Reputable businesses had to compete with those that cut corners and created products based on unsound practices.
The worst of these occurred in the home-mortgage market. Mortgage companies bundled mortgages together and sold them on the global securities market. Knowing that each mortgage was secured by a home, and assuming that housing values continually appreciate, investors thought they had a pretty sure bet.
But, because they had little stake in whether the mortgages were actually paid, originators collected their fees while loosening standards and approving people who had poor credit and employment records. Using adjustable "teaser" rates, they lured them into houses that were way beyond their means.
AIG and investment banks wrote "credit-default swaps," or insurance on the mortgage-backed securities, also assuming homes always appreciate. Because they weren't regulated like insurance companies, they didn't bother to hold reserves that would eventually be needed to pay claims.
Because each individual mortgage could be worth hundreds of thousands of dollars, it's not hard to see how the losses mounted into the trillions, threatening the entire economy, when the entire thing collapsed.
At the same time, consumers -- lured by glitzy ads, credit-card reward points and the desire for instant gratification -- ran up record debt, much of which they couldn't pay, further pressuring beleaguered banks and contributing to the downward economic spiral.
We hope now that a few lessons have been learned.
Businesses need rules and a level playing field to keep the free market from being taken over by the bad actors and their get-rich-quick schemes.
And the rest of us should beware of mindless consumerism, topping out the credit card in pursuit of the latest knickknack or gizmo. Taking a lesson from our parents, we should pay down our debt and -- if we want to make a major purchase -- save up and be sure it's necessary and we can afford it before we buy. We'll appreciate it more for the effort.
In the long run, there's no telling when the economy will recover. But if these changes occur, it will be on a much more solid footing when it finally does.
Opinion
October 26, 2008
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