Perfect Storm Swamped Economy

60 Minutes isn't a program I've tuned into for quite some time, but I couldn't miss their story with Ben Bernanke. It was a fascinating story, where Bernanke was quite circumspect about the root causes of the worldwide crisis but pretty open about his belief in what solutions are best.

The chairman kept studiously away from political statements, but did point out that massive amounts of investment cash over the last dozen years or so drove the investment companies to find homes for that cash. Places like China and the oil-rich middle east were looking for safe places to invest their money with good return on investment.

My own expansion on that, based on extrapolation of other sources of information, is that these investment companies were highly motivated to find a home for all this investment cash. That motivation is what led to the bubble that burst last year.

When mortgage brokers have almost unlimited sources of cheap money to lend, they go looking for people to lend it to. The creation of the mortgage-backed securities market allowed them to package the risky mortgages with less risky mortgages and sell them to investment firms that really didn't know what they were buying.

Fannie Mae and Freddie Mac were heavily invested in the bloated mortgage market, moving beyond their congressional mandate to insure every mortgage they could find. With the approval and encouragement of their congressional supporters, and to the extremely lucrative benefit of the Democrat operative CEO's who became very rich in bonuses.

So when the variable-rate subprime mortages converted from the teaser rates to the much higher market rates, the borrowers began to default in droves. Oil prices spiked due to a combination of prices bid up with concern over expansion of the Iraq war, OPEC production reductions, and American politicians shutting down domestic oil exploration and production.

The energy prices drove many marginal borrowers over the edge. Suddenly many areas of the country saw real estate values plunge, as underwater homeowners defaulted. Investors became very conservative, holding onto what cash they had left and abandoning the real estate and stock markets en masse. The stock market crashed, and an estimated one-third of American wealth has vanished.

The government has spent 2 trillion dollars it doesn't have, partially to keep the financial system afloat, which Bernanke believes has averted a second Great Depression. The new President is jumping on the opportunity ("we can't let a good crisis go to waste") to implement his vision of "change", which is taking the final steps away from a free and open society into a cradle-to-grave European-style socialist society.

The giant ship of the economy now seems to be slowly turning around, but will do so ever so slowly. Unfortunately, it is unlikely return to the prosperity of the 90's and 2000's anytime in the next decade. Perhaps never, as wealth redistribution in the last steps into socialism will ensure all will have to adjust to a new lower standard of living.