Thursday, February 05, 2009

The Economic Crisis as Corruption Scandal

I've been thinking a lot about the American sub-prime mortgage crisis and the following economic crisis that has people all over the world losing their jobs and their homes.

I've decided that the whole thing is actually a disguised corruption scandal.

The problem started when a bunch of con artists discovered the "sub-prime mortgage" scam. You get someone with bad credit into a bad mortgage by selling them the expectation that in a rising housing market, they'll be able to sell the house and make a profit before the mortgage's wicked, crushing interest rates kick in and squash them like a bug.

These scammers are always around, and they're always looking to lure people into giving them money through greed. Sometimes the scams are illegal, but, like those ubiquitous "Money Mart" loan sharking companies, this scam was legal.

But, really, those guys weren't the real bad guys. They couldn't have destroyed the global economy no matter how many sub-prime mortgages they sold. They were making money off of gullible idiots, sure, but not a lot of money. Not in the grand scheme of things. No, the bad guys were working on Wall Street, getting really rich by repackaging turds as gold bullion, and then slipping these turds into the investment stream so quietly that nobody noticed. And then, when people started noticing that their supposedly low-risk investments were actually piles of smelly turds, it was too late. The whole thing came crashing down. With almost a third of the global investments turning out to be turds, the economy just ground to a halt.

The "credit crunch" that followed came partly from the fact that nobody trusted anybody anymore. How could you be sure that you're getting gold when the last time you were handed "gold" it turned into turds? This kind of complete lack of trust is common in poor "developing nations" where corruption is rife, but it really wasn't a part of the Western system until suddenly we all discovered that our system had been rotting out from the inside for years and years.

Just like the corruption you hear about in poor countries, this corruption thrived mainly because the people who could have blown the whistle and stopped the corruption were getting rich by keeping quiet.

Why so much corruption in poor countries but not rich countries? Rich countries, like the USA, normally don't have to worry much about corruption, because turning corrupt doesn't pay enough in comparison to staying honest. You might get more money, but you're also much more likely to get caught, and in a mostly non-corrupt system, getting caught means severe consequences. In poorer countries, turning corrupt pays much, much better than staying honest, and since the whole system has often corrupted (due to no intervention over a long period of time), there are few, if any consequences, even if you do get caught.

Well, the situation on Wall Street during the late 90s and the beginning of the 21st century was an absolutely perfect environment for corruption. Corrupt behaviour payed much, much better than honest behaviour, and since what they were doing was technically not illegal, they didn't have to worry about any personal negative consequences of their behavior. Of course, we've all seen that there were terrible, terrible negative consequences to their behaviour, but they're doing fine.

And the problem is that nobody's been arrested, nobody's going to jail, nobody's even being fined. A couple of financial institutions collapsed, sure, but most of them are being bailed out with American tax dollars.

Well, actually, no, they're being bailed out with imaginary money, money that the American government doesn't actually have, which means they're just printing more money to give to the people who brought the whole system crashing down in the first place.

See why I call it a corruption scandal?

As long as nobody's guilty of anything, the global economy is going to continue to suffer. You don't go to the cops when you think the cops are corrupt. And you aren't going to start investing again when you think the banks are corrupt. Without trust, an economy can't function. And we don't have any trust right now.

Labels: , , , , , ,


At Thu Feb 05, 06:05:00 pm GMT-8, Anonymous Anonymous said...

A really great analysis of the situation. You should be writing for an investigative journal (or maybe joining the fraud squad and putting some of those turd-packagers-sellers in jail)

At Thu Feb 05, 11:09:00 pm GMT-8, Blogger Asphalt Bellyflop said...

I'd be the last one to call you wrong, that's for sure. I've been saying for years that we live in a false economy. It's all based on consumption of things we cannot truly afford, and things we don't truly need. Do you have a right to a place to sleep? Yes, everyone should have that, in a civilized society. Do you have a right to be able to buy a home? Many would argue that, and this is where the subprimers come in - they exploited a rapidly growing cachet of people that believed strongly that not only was it an excellent idea to own a house, they needed to be able to. The government worked on that by making these things "not illegal" (as you state as well), which I prefer to "legal". :) So people bought houses, had jobs, and lived at their limits, but hey...... more credit was a phone call away. I remember when we first bought a house, we received letter after letter offering us more credit.

Here's the other problem with today's 'crisis'. Banks are still giving out tons of credit! "But there's no credit anywhere!!!" the media says. "Yes there is" says the banks "and you can have a ridiculous amount right now, and if you want more, we just need to make a request and wait a week, where you'll probably be approved anyway." The media.... well, they're guilty in this too. Right now, with bad news everywhere and unemployment up, the crashing newspapers are finally being read again. Many people can't get enough news right now, and are freaking out at every opportunity. But then why did Coquitlam Centre have their best Christmas season in the history of the mall??? Why are people still spending oodles of money on travel?

In other words, when we hear 'recession', why does everyone go Chicken Little? It's an aggregate number that means next to NOTHING to the average person. It means that things aren't going as well as they once were, as a whole country idea (I would argue that Canada is two places right now though... East and West). It means that spending stupidly isn't a great idea. But what people don't realize is that stopping your spending doesn't help things. Live your life, do your job well, pay attention to what's happening with your workplace, keep a better eye on your spending, and..... well, the majority of Canadians are probably going to weather this just fine. The false economy is dying out, and it's not necessarily a bad thing. A guy drilling holes in a car (one that won't sell) for $70 per hour? That's stupid. 10 guys going to a logging site where you only need 2 now, because technology allows it? That's stupid too. For those people, it changes how they will live their lives. While I feel sorry for them and their families, it was a false environment that shouldn't have existed in the first place. This "evil recession", in a lot of ways, is simply correcting a lot of the wrongs. It's not that simple of course, but.....

As for the buyouts, I see from this standpoint where they need to happen. The irony, of course, is that these are the companies that scoffed at government intervention before, and now go to them with smooth, unblemished, manicured hands looking for handouts. But there are too many regular people affected by this, and the bailouts - ideally - should help soften that blow. The crazy part is, like we've always heard, the government doesn't know how to run a business. So are there going to be enough safeguards to ensure that the bailouts actually do what they are designed to do? Of course not, there are rich, high-powered votes to keep!

It's all nuts. Fabricated? A little. Overrated? Absolutely. Scary? Sort of, because people are stupid. Seems better when you turn off your TV though....... :)

At Fri Feb 06, 09:05:00 pm GMT-8, Anonymous Anonymous said...

People are spending "oodles of money" because they are fools.

"Coquitlam Centre [had] their best Christmas season in the history of the mall" because we are in denial.

I don't think the majority of Canadians will be as we want to be, but I do agree we will be just fine.

That's the problem. What we "want", and what is "just fine", are way off.

This is why I sold my stupidly expensive car. I'm fine.

We can't simply paint this elephant and say that it's gone.

It has got to stop. It has got to die.


Post a Comment

<< Home