By Martin Bosworth
In looking at the various examples of bad economic news over the last few days, I’ve been struck once again by how the supposedly rational, logical, God-forbid-we-regulate-it-because-it-works-fine-on-its-own free market is driven by the very human fears, frailties, and stupidities that govern so much else of human life.
It’s pretty amazing, for instance, to watch Treasury Secretary Hank Paulson saber-rattle China over its trade policies and reiterate the health of the American economy while his own former firm’s hedge funds are getting kicked in the nuts. Or that Federal Reserve Chairman Ben Bernanke could repeatedly state that the failures in the American subprime mortgage lending market could be “contained,” even as the global markets are pumping out new money like blood transfusions while the credit crunch jitters extend across the world.
These are perfect examples of what I like to call “faith-based investing,” the belief that somehow you’ll be able to ignore or overcome decades of economic advice, market indicators from the world over, and your own common sense, and strike it rich in risky investment areas that promise huge profits for little work. That’s how the housing bubble was created–people were encouraged to buy into the market using “creative” mortgage products, lying about their income and assets and clicking their heels together in the hopes of selling their homes before the ARM reset to a much higher rate, or bringing in enough income to pay for it.
And the lenders and brokers were no better, as this column from CreditBloggers succinctly notes:
What happened with the subprime lenders was that they simply threw out the rule books altogether. The executives and other employees became so addicted to the massive amounts of money they were making, – two, three, four times or more than what ethical lenders were earning on comparable loans â€“ that they just didn’t want to quit. They would approve anything!
As long as the money kept coming in, everyone–from borrowers to sellers to lenders to brokers to executives–fooled themselves into thinking the profits would last forever and that the American economy (and the global economy by extension) could enjoy healthy growth and strength based solely on the real estate industry. Now that the markets are tanking, the house of cards is tumbling, and the futures are seeing everything from more cash transfusions to the possibility of the Federal Reserve lowering interest rates to spur more lending and borrowing. Yeah, because that worked so well this last time around.
In the end, this will probably require some kind of government bailout to prevent total economic collapse, which will make me laugh heartily the next time someone yaps about how regulation stifles economic growth or whatever. But as Ian Welsh from the Agonist notes, even if we pull off another miracle bailout this time, the underlying problems won’t go away, and we’ll just be in a set of worse circumstances next time.
That’s what happens in “faith-based investing,” when you forget everything you know (or never learned) about how money and economics works, click your heels, and take incredibly stupid risks with your money (or other people’s money) just to earn fat bonuses, commissions, or capital-gains free home sales profits. Because it always bounces back in the end.