Thursday, April 22, 2010

Why it happened and Why it wont be fixed

Normally I like to just focus solely on housing but I thought this article regarding Raghuram Rajan synopsis of the credit bubble and our political blind spots was especially good.

On the causes:
The first Rajan fault line lies in the U.S. As incomes at the top soared, politicians responded to middle-class angst about stagnant wages and insecurity over jobs and health insurance. Since they couldn't easily raise incomes—Mr. Rajan is in the camp that sees better education as the only cure and that takes time—politicians of both parties gave constituents more to spend by fostering an explosion of credit, especially for housing.
Since politicians can't make companies pay more and have been horrible about fixing what ails our educational system they take the short term easy road and try to allow cheap and easy credit to replace their (and our) failings. We have made it where anyone who gets into college can get a loan and anyone who wants a house can get a house. But taking on a bunch of debt isn't the solution to stagnant and declining incomes. But you can't get voted in on telling the constituency to work harder and learn more.

A third Rajan fault line spread the crisis. The U.S. approach to recession-fighting—unemployment insurance and the like—and its social safety net are geared for fast, quick recoveries of the past, not for jobless recoveries now the norm. That puts pressure on Washington to do something: tax cuts, spending increases and very low interest rates. This leads big finance to assume, consciously or unconsciously, that the government will keep the money flowing and will step in if catastrophe occurs.

Compounded by hubris, envy, greed, short-sighted compensation schemes and follow-the-herd habits, these expectations that the government will save us all leads big finance to borrow cheaply and take ever bigger risks. No democratic government can let ordinary folk suffer when the harshness of the market brings the party to an end, as it inevitable does. Big finance exploits what Mr. Rajan calls this "government
decency" and bets accordingly.

I thought this part of the article was great. Our political & monetary system is geared to fight the last war. Even at this late of the bubble popping stage the politicians haven't correctly identified the cause and effects which means the solutions they are working on won't work. The capital system has adjusted to the blind spots just fine. There comes a point where very hard decision will have to be made and it will effect wealthy and poor alike. The politicians would like to put the burden on the top 1% or top 10% but the structural issues have gone on far too long for the burden to be borne by anyone but the whole of society.

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