Thursday, August 9, 2007

Euclid's Theorem

This post is somewhat of a follow-up to my previous post on the moving of debt from credit cards and direct loans to the less liquid mortgages generated by the housing boom.

Today the LA Times reported a tumble in U.S. markets because of concerns over liquidity resulting from a preponderance of subprime lending. I think it's important to take stock of what is being done to combat it, and moreover, what this means for the future of the system as a whole (need a refresher on subprime lending? liquidity?).

The U.S. Federal reserve responded, as the article reported, with an influx of cash into the economy. However, this was not done in order to help defaulting lenders repay, but instead ease concerns about liquidity. That means that all it does is stave off or slow the growing subprime crisis insofar as it allows housing market lenders to continue to operate, since they can continue to find the liquidity necessary for lending (which they lack now due to the abundance of default from subprime borrowers during the crash landing of the housing market).

President Bush, despite doing blow for most of his Harvard education, seems to think that a tax break is what is needed. It's interesting that Bush continues to claim that the economy is strong, citing jobs and the flourishing of small businesses. I think that's big-time irrelevant, as we're only in the beginnings of the housing decline. As more and more people (because we should remember that "subprime lenders" is a fancy term for "the working class") begin to have their houses (and other assets) repossessed because of default, the job market and small businesses will be left in the dust.

But what about the tax breaks? We should be clear from this administration (nay, capitalism as a whole)'s past that these breaks will again be for the rich, which makes them tantamount to the Fed's reaction - something intended to stave off liquidity concerns. This is all intended to support investment in the American economy, but it is investment that the economy cannot support given the deflation of the housing market. We should be clear that when the liquidity of the market is the prime concern, we're gonna have problems. This is because of capitalism's need to maximize profit. If the concern is over liquidity, because investment in [insert your favorite market here] is hot for profit right now, the businesses have no choice but to invest to the end of the liquid assets. The kneejerk reaction to this, however, once the money dries up, is a panic of investment of any kind, making Blackhawk Down seem like the Silicon Valley Boom of the mid-90's.

I think it's important that we place the blame where the blame belongs - on the system. Since profit maximization is gospel, lending will occur, at whatever the cost, both to the borrower or the lender. That's why subprime lending exists in the first place.

Oh, and in case you thought that maybe a Democrat in office would help with this situation, consider what Charles E. Schumer (D-NY) has to say about the cause of our current woes:

He said the housing crisis occurred in part because borrowers had not read the “fine print” on their mortgages. “There needs to be financial education measures in place,” he said.
Yes, and by that logic, rape victims are to blame because they wear provocative clothing.

Moral of this story: capitalism booms and busts, and there's nothing the Fed can do to stop it.

Why is this so hard for the ruling class? High schoolers seem to have it all figured out already.