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by J. F. Kelly, Jr. | Coronado Born in 1930, I was a product of the Great Depression. I was just a carefree kid, of course, but I retain plenty of memories of how bad it was in the thirties. Everyone knew people who couldn’t find work and almost every family we knew was affected by the hard times. The government didn’t have the tools it has now to deal with a sick economy and the depression dragged on until World War II changed everything and the country mobilized for war. Today, the federal government has the tools at its disposal to deal with financial crises but in spite of that, the nation finds itself in the worst financial crisis we have witnessed in my lifetime. We are seeing a near meltdown of our financial system with the failure, merger or government takeover of financial giants like Lehman Brothers, Merrill Lynch and Ame4rican International Group (AIG) in rapid succession. No one knows when the next shoe will drop. And it is spreading throughout this global economy. Huge chunks of personal, corporate and institutional wealth has vanished as the value of equities, bonds and other investments plummets and no sector seems immune to the carnage. Americans look with disbelief at their IRA and 401k statements and the declining value of their homes and feel much poorer. Borrowing becomes much more expensive for individuals, businesses and local government entities, even those with good credit ratings, and credit eventually dries up. Without available and affordable credit, most businesses cannot operate for long. Some critics fault the government for rescuing AIG, Fannie Mae and Freddie Mac but some businesses are just too big and too important to be allowed to fail. The impact could be catastrophic. The government must do what it must to break the chain of failures before it spirals out of control. President George W. Bush cancelled travel plans in order to remain in Washington to deal with the crisis. Congress is well-advised to postpone its plans to recess until after the election while leaders meet in Washington to develop plans to cope with the crisis. As the magnitude of the crisis and its likely long-term effects sink in on most Americans, anger will mount and blame will be assessed. The tendency, of course, will be to blame the administration, but there’s plenty of blame to go around and Congress should not be spared its share. The seeds of this crisis were sown early and there was plenty of time to take corrective action. Still, the buck stops with the president and Mr. Bush will be saddled with most of the blame, fairly or not. This crisis comes at a most inconvenient time, as crises often do, for the McCain-Palin campaign, which enjoyed a big boost from the Republican convention and the emergence on the national scene of Gov. Sarah Palin. Alas, the public is fickle and its attention abruptly shifted from the personable and photogenic Ms. Palin to the economy. Mr. McCain, meanwhile, picked a terrible time to comment favorably on the state of the economy. While neither presidential candidate displays much evidence of knowing anything about economics, Mr. McCain does bear the brand of the party in power and that will likely hurt his candidacy. The search for blame should start with those responsible for the housing bubble which started this death spiral. Irrational exuberance certainly characterized the housing market and created the unreasonable expectation that housing prices would forever rise. Congress and lenders helped perpetuate the unrealistic notion that there should be a mortgage product for everyone, even for those with no verifiable income or regular employment. Home ownership, after all, was part of the American dream and wasn’t everyone entitled to that? Greed compounded on greed. Everyone from buyers to builders to lenders to investment bankers to investors wanted a piece of the action. Sub-prime mortgages were securitized, bundled and sold worldwide in spite of the fact that it was difficult to put a realistic value on them. Defaulting mortgages finally signaled the end of the joyride and home prices haven’t stabilized yet. I remember well when lenders first came up with a new lending product called an adjustable rate mortgage (ARM). It was marketed aggressively because lenders liked the idea of not being stuck with a fixed rate when the cost of money rose. I thought at the time that it was a terrible idea. I felt it would open the door to all kinds of crazy “creative” lending packages. Unfortunately, I was right. CRO copyright 2008 J.F. Kelly, Jr.

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