| The Economic Crisis: Passing the Hot Potato The game is set in motion by a junior loan officer at a small mortgage company who makes a pitch to a recently married couple with a baby on the way. |
| Invention Development Advice - Marketing | |||
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The young couple is just starting their life together. They tell the officer they saw an ad on television that claimed they could buy a home with no money down.
The young couple is just starting their life together. They tell the officer they saw an ad on television that claimed they could buy a home with no money down. The loan officer confirms the claim and assures them that despite their lack of means, they could have their little dream home: not in ten years, not in five years, but today! Not only that, but they can be in their new home for a full six months without paying a single cent! The wife is a little hesitant, but her husband assures her that lots of their friends have done it, so why be left behind? Let's go for it, he says to his wife and she finally gives in. The couple discuss the offer - the wife has some reservations, but her husband reassures her that this is the way to buy a house these days. Eventually, they both agree to go for it. At the same time, salesmen across the company are signing other couples up and getting them to commit their funds. So far, so good, but now what? Jim thinks it's a capital idea and soon an investment house buys the mortgage company's portfolio. They in turn use it to secure shares in the mutual fund they are offering to investors. Shares are sold to investors as well as institutions. One of these institutions is a much larger investment fund based in New York. They bundle the investment with other similar securities and create a new fund which is once again sold to investors. A fund in Singapore likes the investment house's balance sheet and purchases their firm along with its entire portfolio. And so it goes. Among these investors is a much larger investment fund which sells its shares onto new investors as part of a new portfolio. Meanwhile the investment house comes under new ownership and many of its assets come to be controlled by distant firms operating in other countries, and so the process continues. Then the bubble is stretched too far. The housing bubble bursts and the mortgages securing the securities are worth next to nothing. The mortgage company is no longer on the hook as they sold the mortgage to the first investment house. They in turn passed off their securities to their clients, taking commission on the sales. When it eventually bursts the mortgages securing the securities lose their value altogether. The mortgage company is not to blame, since it no longer controls the mortgages it sole in the first place. The investment house likewise is no longer responsive and so on. Everyone involved in the process has done nothing but buy up debt, combine it with more debt, and sell it on like a ticking time bomb. When it goes off, all anyone is interested in is not being in possession of the accumulating debt and therefore having to pay it off. Most of these securities are held by mutual funds, banks and insurance companies in all four corners of the world. Those who manage these funds have made a tidy profit from their efforts in the last few years. So who must ultimately pay back the debt? To some extent the shareholders invested in these funds will be affected: the professionals and those who have their savings tied up in shares. These are ordinary people like you and me, and it is ordinary people who will have to pick up the tab when the government bails out the failing investment houses out of public funds. Meanwhile, our young couple has been unable to hold on to their home now that they cannot afford it, and they must file for personal bankruptcy. The pensioner who holds the mutual fund units sees a considerable part of his savings simply disappear. And generations of taxpayers are left with the bill for others' mistakes. Should we blame the management of the investment houses? They were acting on the professional advice of their qualified experts in the research department. How about the experts they relied upon? They were only following the advice of what all the economists were saying. The only one left to blame is the economist, the man behind it all. He will tell us that based on the model it should have worked; however, certain unanticipated events (such as the extent of human greed) were not fully taken into account. We might wish to lay the blame on the doorstep of the investment houses, but they were basing their actions on the advice of experts - experts who were only doing what the economists told them to do. At the end of the day, then, surely it is the economist who is ultimately responsible? According to himself, however, he based his advice on an economic model which performed exactly as it should have - making a prediction which cannot take into account all mitigating factors. It just happens that the prediction turned out wrong.Meaning that we are left with the question, who is actually to blame? And no one, it seems, can answer the question without attributing blame to 'nothing and nobody'. Economic anomalies are blamed, or exceptions which are said to prove rules. Some people have called the resulting crisis 'an Act of God' - something which could not have been predicted or prevented. Still others enjoin us to accept it as a necessary part of the rise and fall of spending which makes capitalism what it is.
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