Monthly Archives: April 2009

The article Up in Smoke by Paul Mattick from Radical Perspective on the Crisis, explores how today’s’ economy recession can be compare to depression from the past. The difference between this two is that present situation can be controlled by government and it can be fixed but it has to be done fast. Governments started already working on this issue. It spent so much money; however, this is not enough. Out economy requires much more resources, which is more money.

“By the official end of summer, as I am writing this, that comparison is everywhere, if only as background for insistence that this time the downward spiral can be controlled—provided that the government does the right thing, and does it fast. (…) Commentators argue about what that thing is, of course, though everyone agrees that it will involve huge wads of money.”

Government is still thinking about the $700 billion plan for institutions that cannot find answer for their issues. What would happen to this money instead? It could be used for good for all people, ex. education, health etc. But no, government has to help companies that will not survive on the market and bankrupt. This money will be used in “good cause”, by this cause I mean paying executives, investors, the ones that lose money or will not get because of bad situation of companies.

“If the House finally knuckles under and passes it, one thing is clear: the trillion dollars or so that you might have fantasized would some day pay for new schools, healthcare, or even just bridges that don’t fall down, is going to flow instead into financial-institutional coffers, affecting nothing but the ability of those institutions to keep afloat. This will be money spent not for things or services but simply to replace some other money, now departed from this world of woe.”

Than we see how everything started to go bad with houses. Companies started using swaps, credit derivatives to invest and get some money. However, some companies such as AIG did it very bad. Because most of them are not regulated, and were not categorized as insurance product, companies did not have to put anything aside for losses. Therefore, when housing prices started falling, and losses started piling up, it had no way to pay them off. Not understanding the real risk, companies grievously mispriced it and lost money.

“It’s easy to forget amid all the fancy stuff—credit derivatives, swaps—that the root cause of all this is declining house prices.” People, from humble homeowners to Wall Street Masters of the Universe, imagined that house prices would climb forever. When they started to fall, the institutions that bought mortgages and borrowed against them, treating them as the equivalent of high-valued houses, suddenly found themselves unable to meet their obligations.”

 

 

Government tried to fix it and decrease interest rates, but this also increase debt so it made even worse. Than securitization of mortgages started to increase and money get lose in way between. Foreclosures went up, people lost their houses, and mortgage market shrunken. Therefore, government goes in and “print more money” for financial institutions. It has to help them because if not “what will the financiers invest in, if they become solvent again?” Moreover, money again will interrupt in economy, but will it rebuild? Some people says that “the real economy”—the economy of production, distribution, and consumption of actual goods and services— should appear and repair our situation. “

Again, we can see that big fellows get money, and we – little guys –  lose it. Is it fair? I do not think so. Government should do everything what is the best for all society, but instead they give money to those that have them, and the ones that need money will get zero. We see this everyday but now everyone can experience it. Economy was bad before when government gave money to financial institution and now the situation repeat again. We can see that government did not learn a lesson. We will wait and see for the next few years.