I’ve tried to read about the current financial crises in order to learn how this thing came about and where it may be going. The one thing I learned is that while I’m certainly no expert about financial matters, neither are the so-called financial experts. You know all those MBAs at the investment firms who worked 12 hours a day creating deals and new formulas for pushing more paper around. So here’s a little bit of history that I learned:
In the late 1920′s people borrowed money from their brokers to buy stock; sometimes small investors were loaned more than 66% of the value of the stock being bought. This speculation pushed stock prices higher creating a bubble. Brokers were happy to lend the money because the market was going up and they believed they would get their money back when people sold at higher share prices. More people, even those who could not really afford it or even had money were able to borrow, join in, and buy stock. People became millionaires and believed this could go on forever. Then in early September 1929, stock prices started to decline. People couldn’t repay their brokers or get more money to buy stock. In the weeks that followed the market saw wild swings of up and down days. Well we all know what happened, at least some of us do.
It seems all the MBAs working in government and our financial institutions were out on the day they taught economic history in business school. Now let’s edit that paragraph a little:
In the early 2000′s more and more people were able to borrow money from their brokers/banks to buy homes. This speculation pushed home prices higher creating a bubble. Brokers and banks were eager to lend more money because the housing market was going up and they believed they would get their money back when the homes were sold. More people, even those without good credit or even income , joined in and got mortgages to buy homes. Everyone was becoming a homeowner. When people couldn’t pay their mortgage they simply refinanced and used the money to pay for the new mortgage. They all believed this could go on forever. Then in 2006, home prices started to decline. People couldn’t pay their mortgage or refinance to get money to pay the new mortgages. Well we’re all going to see what happens now.
I think Tome Wolfe recognized exactly what was going on on Wall Street in the late 1980s and described it best in Bonfire of the Vanities. Here Sherman’s wife Judy eloquently describes to their son what daddy does:
“Darling, Daddy doesn’t build roads or hospitals or anything, really. Daddy just handles the bonds for the people who raise the money…See, just imagine that a bond is a slice of cake. Now you didn’t bake that cake, but every time you hand somebody a slice of that cake, a little bit comes off, little crumbs fall off. And you’re allowed to keep those crumbs…And that’s what Daddy does. He passes somebody else’s cake around and picks up the crumbs. But you have to imagine a lot of crumbs. And a great golden cake. And a lot of golden crumbs. And you have to imagine Daddy running around picking up every little golden crumb he can get his hands on. That’s what Daddy does.”
So perhaps on a deeper level this is how America has gone astray. Sometime in the 1980′s instead of wanting to build and create things too many young men and women went to college studying how to pick up the crumbs. What’s even sadder they were convinced that crumbs from their crumbs would “trickle down” and build America! Now there are very few crumbs.
Tags: Economy, Medicine, National Issues by Jay Stuart
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