As an economist, people have often asked me why is the financial crisis ocurring. The answer, in the end, is pretty simple. Let's reduce the problem to a single person. When one has too many debts, so that they are impossible to pay and one continues to get more indebted to be able to pay the last debt, so that one is everyday more indebted, eventually the people or banks who we owe money will realize we cannot pay them back. This is known as a Ponzi scheme, such named in honor of Carlo Ponzi, an Italian immigrant who was the one who originated such schemes. Any pyramid scheme in the end is a Ponzi scheme...if you know who Bernie Madoff is, you know the granddaddy of all Ponzi schemes...at least on a micro level.
On the macro level the biggest Ponzi scheme has just recently fell before our eyes. The US was mantaining (yes the US as a country, as a whole) a level of debt towards the whole world that it couldn't pay. The debt became bigger, and bigger, and credit in the US was ever flowing: credit cards, second and third mortgages, financial plans to pay new cars; and the debt got bigger, and the world (China, Mexico, Japan, etc.) continued to lend money to those people that had several mortgages and 5 credit cards (a Visa, a Mastercard, an American Express, a Diner's club, and your local department store credit card) rocketing to the limit.
The Ponzi scheme fell: the debt became unpayable,big banks declared bankrupcy...and credit crunched, and the worst crisis since the Great Depression hit the world. Incentives were ill aligned: banks pushed credit, and people wanted to consume more...so it was, human nature.
Should there be more regulation? Personally I don't think its the way to go, better regulation rather than more is probably the answer.
Will we get out? How and when will we get out? Now those are the difficult questions.
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What about Alan Greenspan? I understand he had something to do with that...
ResponderEliminarnope...if you ask me, he's just an escape goat
ResponderEliminarI disagree. About 10 years ago, while Clinton was still President, people were talking about how there was going to be some real prosperous times ahead. The US was going to be able to pay off all its National debt, fix social security and be rolling in the dough. Alan Greenspan was pushing this idea and he addressed the Congress with it, even going so far as to say that the US should NOT ever become an investor.
ResponderEliminarGuess what happens when you tell---no---guarantee a government full of politicians that there is a shitload of money coming? They spend it like there is no tomorrow. And that is EXACTLY what they did and still do to this day. I put a LOT of the blame on that idiot!
I still disagree. Its like the US government had no one else to ask about its economic future? I believe incentives weren't the correct ones. Bank CEO's and brokers got their fat bonuses for lending money, not for getting it back and for this year's performance not their performance in the past few years. There's a very interesting article on this on the last Economist. Alan Greenspan is just a human, he makes mistakes, the crisis is not his fault. The crisis was a big snowball that kept getting bigger and bigger and finally exploded. I'm sorry to hear your opinion. To me Greenspan has the same blame as Average Joe that stopped paying his third mortgage.
ResponderEliminar