It’s pretty simple really. The Federal Reserve Bank creates and destroys money. It has had that power since it was created in 1913. The trick is getting the supply of money right – not too much, not too little. But the Fed didn’t get it right. They printed too much money in 2003, and too little in 2006. Hence, the crisis.
If you found recent economic events confusing, it’s not your fault. Part of the confusion is due to the people whose job is to explain all this to you: the financial media. They got the story backwards, and having it confused in their own minds, were unable to make it clear in yours. I’ve known many, many financial journalists over the years and very few of them were involved in markets. Typically, they went to journalism school, not business school. They planned for a job in media covering politics or sports, not business. They don’t know much about how markets work, and (more importantly) they’re not inclined to give people who work in finance much benefit of the doubt. They believe that investors and brokers are, as a group, prone to large mistakes. When the value of investments such as homes or stocks move up quickly, and the journalists don’t know why, they label the phenomenon a ‘bubble’. They believe that these foolishly optimistic investors will soon become foolishly pessimistic and then the ‘bubble’ will ‘burst’.
That’s when the people in the media really go to work; they start searching for somebody to blame. Real estate speculators have to be held accountable, they say. Or perhaps it’s the mortgage brokers, who never should have agreed to give them mortgages in the first place, or the banks who approved the mortgages, or the state regulators who didn’t license the mortgage brokers properly. Perhaps it’s ‘predatory lenders’ who suckered people into paying too much interest, or the investment banks who bundled these mortgages together into a special kind of bond called a CDO. Maybe it’s the rating agencies who offer an opinion on how risky the investments are, or the hedge funds who bought them with (too much) borrowed money.
Maybe it’s the whole system, global ‘cowboy’ capitalism which has grown too big to be regulated by any one government, especially the mysterious and shadowy world of ‘derivatives’. If the journalists can’t understand them, then, of course, nobody can. It’s just too complicated!
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