Sep 29 2008

Federal Bailout of The U.S. Economy: Who’s To Blame?

14 responses so far

14 Responses to “Federal Bailout of The U.S. Economy: Who’s To Blame?”

1. # Laura Murrayon 30 Sep 2008 at 12:12 am

   So as you said you cannot blame this situation on only one firm or person as so many companies work together. I believe your reasonings are good but the FEDs maybe could see this happening but they want to give the firms the freedom to decide, no? Of course now they are the people who have to bail the people out but shouldnt there actually be some kind of trust between the FEDs and the companies? I dont believe democrats nor republicans can be balmed as they only contrubute a little to this mistake of firms. I dont believe this can be prevented in the future as people rely on loans and banks need it to expand. This can always happen but the Feds should be warned and understand they can no always bail everyone out. as this will cause more firms to risk this.

2. # Steve Latteron 30 Sep 2008 at 3:30 am

   Hi Laura,

   I like your response in that you carefully are questioning what the appropriate balance should be between Government oversite & regulation and free market freedom.

   You are also correct that the answer cannot be to bail out private firms whenever they make a mistake as this will romote excessive risk taking.

   Thanks for the post!

3. # Sophia F.on 30 Sep 2008 at 5:41 am

   Hi Mr. Latter,

   I was just reading an article that said that the House just rejected the $700 billion bailout plan. This doesn’t really make sense to me…won’t everyone (not just the companies) face even greater financial problems in the long run because of this decesion? I also saw that stocks have started dropping already since the rejection of the bailout plan. Will it get worse…and is Paulson going to have to devise a new plan?
   And I also agree that this is neither a Democratic nor Republican issue, as both sides voted against the plan.

4. # Steve Latteron 30 Sep 2008 at 6:20 am

   Hi Sophia!

   What a day! The bailout bill did not pass today! And, yes, as a result the stock market fell more points than it ever has before! Main street’s college savings and retirement savings was socked squarely in the jaw!

   Apparently, our U.S. Congress is not yet convinced that the $700B bailout is really for “main street” (ie, everyday Americans like you and I) depsite the slew of failing banks and deterioration in the lending markets. Congress must not (yet) believe that the “economy doctors” (Paulson and Bernanke) are correct about the critical urgency of the bailout to save the economy. Congressmen must be still viewing the situation as a bailout of financial firms and bad managers and do not realize the true economic severity of the current situation!

   It’s kind of sad in my opinion. It came down to a political vote with 2/3 of the Republicans NOT voting for the bailout with over half of the Democrats voting for the bill. It’s also sad that our Congress continues to see the bill as adding to the national debt when the plan is supposed to be “taxpayer neutral”. And finally it is sad that our leaders (Paulson, Bernanke, Bush, McCain, Obama, and Pelosi) are not skilled at explaining the importance of the bailout plan to the Congressman or the citizens.

   The latest news is that the Congressmen are expected to get together again on Thursday to try again. If you don’t succeed at first, try again!

   And I thought last week was economically unbelievable! It looks like more is in store for the world this week. Look to see what happens in the overseas market tonight (Asia) as there may likeley be a huge international stock market decline as the International economies were all counting on the bailout passing today. A U.S. deep recession or depression will hurt their economies as well due to global trade and interdependence. Almost all international economies were in support of the U.S. bailout.

5. # Joey Greeneron 30 Sep 2008 at 9:44 pm

   I feel that reason #3 is most at fault with the greedy CEOs. I feel that they loaned to people who they should not have loaned to and it really messed up their companies. Although I feel they are at fault I do not know exactly what else they should have done. Mr. Latter, would it have been better for them not to help them at all to save money?

   I have found it hard to keep my political views out of this because I have certain opinions of politicians that have swayed my opinion on their ideas. And to be honest, I don’t really like either of the presidential campaign ideas but prefer the Paulsen plan we discussed in class.

6. # Steve Latteron 30 Sep 2008 at 9:50 pm

   Hi Joey,

   Thanks for the post.

   It should be in the best of interest of companies to make good loans, otherwise they will not get paid back. Yes, the free market would say that the companies should not make the loans. People will survive. Many of these defaults are not from first time home buyers but people buying up.

7. # Georgeon 03 Oct 2008 at 1:33 am

   I read this on another blog and thought it fit here:

   “Listening to the discussion I wanted to make a post (which I will eventually) emphasizing that economics is not politics and politics is not economics; and political economy is neither public policy analysis nor an art of compromise. Instead, economics is a science, politics is a subject, and political economy is a branch of moral philosophy. Just because politicians talk about economics doesn’t mean they are making any sense, and just because some economists compromise in political discourse doesn’t mean they are doing economics.

   A few things to keep in mind during the coming days:

   (1) While there may be macroeconomic problems, there are only microeconomic solutions;

   (2) Microeconomics is about the structure of incentives and the quality, accuracy of the information (and its interpretation) that economic actors face and utilize in their context of action; The institutions of property, prices and profit/loss provide incentives and information to market participants;

   (3) Economic life is a process of constant adaptations and adjustments to changing circumstances, and these adjustments primarily are guided by relative price shifts, the lure of profit, and the penalty of loss;

   (4) Inflation is damaging, deflation is damaging — as Mises once put it, trying to cure the problems created by one by following the other is analogous to someone after driving over a bystander with their car in an effort to try to fix things by backing up over them to undo the damage;

   (5) Wealth creation results from realizing the gains from trade and the gains from innovation, not government investment.

   If there is no bailout, then the stock market will go down, more financial institutions will fail, and unemployment will rise. But resources will not go into a black-hole, they will be reallocated and utilized in alternative uses.

   To leave with some words of wisdom from Adam Smith:

   “The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations; though the effect of these obstructions is always more or less either to encroach upon its freedom, or to diminish its security.” “

8. # Hope Linthicumon 10 Oct 2008 at 9:01 am

   These past few weeks, there has been one specific question begin asked. Who is to blame for this economic crisis? Personally, it worries me that people are more worried about who is to blame instead of how and can be stopped or fixed. I think that if everyone was less concerned with who to put the blame on and more concerned with working on ideas and strategies to get the economy back on its feet, then either this problem would not have gotten as out of hand as it did, or it would have been solved sooner.

   Also, I think that this presidential race’s “October surprise” This huge economic crisis is having a major impact on the campaigns. Unfortunately, I think that most people are blaming the President for the entire economic failure. Because of this, I think that this hurts John McCain’s chances of being elected because people are associating him with George Bush, even though he is the most independent republican we’ve seen yet. I don’t see how democrats can try and put the blame on Republicans when the house is made up of mostly Democrats.

   Of course, greedy CEO’s and private lenders got too greedy. But, isn’t there someone who checks on that, or regulates what they do in order to prevent situations like this? I have heard John McCain say that he and other senators signed a letter warning congress about this. What I don’t understand is if congress just flat out ignored it, or if the letter wasn’t forward enough. I would like to learn more about who passed the law saying that companies such a Fannie Mae should give lower income people more loans. You would think that people who pass the laws are so aware of what could happen, and so relied on would know to make better decisions than that.

   By reading your blog, I realized that there really is not one single party, or person at fault. This whole economic melt down was a result of several different factors mixing together and leading to a bad state of affairs. I just wonder why the media, politicians, and other head figures are having such a hard time conveying that to the American people. Hopefully this Bailout Bill will get the economy back on its feet, and people will learn that putting blame on others won’t help any situation.

9. # Holly Robisonon 10 Oct 2008 at 12:45 pm

   I believe that there are too many people to blame, but especially the greedy CEO’s. They put pressure on the banks and companies to lend out more money than they could manage. Although I think it is necessary for some form of a bailout plan, I think there must be a better way to create a more agreeable compromise. Although the economy is completely unstable, the bailout plan was also unreliable. I know that eventually it is supposed to help everybody, that’s why the government is getting involved in the first place, but I can’t help but wonder if there is a more stable way to help them reestablish the credibility of banks and companies. Because if this plan fails, not only will the companies and banks have more problems, but the American society will be the ones paying for it. Would it be better for the poor loans to be corrected and then establish new companies rather than trying to fix companies such as Fannie Mae and Freddie Mac? After whatever bailout plan is created, how can we prevent this from happening again in ten years? What is the most important thing that needs to be fixed right now in order for the economy to fix itself? The banks, the companies, the housing market, or people’s perspectives? It appears to be such a complex web of issues to me; I don’t know where to begin.
   I am becoming increasingly frustrated with politics currently because every debate has been completely focused on pointing the finger at the opposing party. If the candidates would stop wasting time on a problem that’s already occurred and started genuinely trying to find an answer to the economic crisis, the public wouldn’t be complaining that a $700 billion dollar loan is not enough money when earlier in the month they thought it was outrageously expensive. As a supporter of McCain, I know he tried to warn people of the economic problems he knew were coming. Obama continues to just bash on the problems in the economy and just continues to talk of lowering costs for people when that isn’t relevant enough to the issue at hand. My frustration with the candidates arguments although has left me unbiased. I think there are too many sources for somebody to blame a specific party on the problem. I am hoping that the public will become more aware of the stupidity of the arguments currently and realize the necessity to act fast before the economy gets even worse.

10. # Chris Griffithon 11 Oct 2008 at 12:53 am

    I agree that there are alot of people to blame for this economic crisis and the need for this $700 billion bailout. I believe the top two to blame are the financial companies who gave loans to risky low-income households, but also part of that blame should go to those low-income households, many of which are now criticizing what is going on, who took the risk in taking out loans that they should have known may be too much for their income. Although it is hard to blame the low-income households because the financial companies risked alot to make these loans available to them in hopes of making more interest income.

    As far as politics go, I do not believe that this is a Republican nor Democrat issue but there should also be some some blame on the government for not regulating these financial companies from giving loans to people that they knew were not able to pay them with their current income. Obama gives me more comfort regarding his views on the bailout. John McCain seems to be playing politics a little to gain votes, especially after the most recent debate where he proposed his plan of using $300B to buy more assests from these companies which he now is recieving criticism even from within his own party. I am more comforted by Obama who does agree with the $700B bailout but is settled with that.

    Also, I was just wondering about #4, “New law had been passed several years ago, urging that Fannie Mae and Freddie Mac make more loans to lower income households that carried much more risk.” Does this mean that the government passed a law that encouraged Fannie Mae and Freddie Mac to make these loans to lower income, high risk households?

11. # Carly Wonderon 11 Oct 2008 at 2:42 am

    The blame for this economic crisis can not be pin-pointed at just one person or group. The obvious and most frequently blamed are the CEOs. They misled not just the American people but the world. The Asian stock markets are suffering drastically, as well as the European markets. Another group to blame are the homeowners who took out loans that they had no means of paying off also need to take up partial ownership of the situation. I realize that the banks might of misled the homeowners, but they should of been more responsible and aware of their personal finances . Most of all, I believe that governemnt is the most responsible. They knew years ago that Fannie May and Freddie Mac had loan issues, but the legistlation was voted down by Congress. The governement could of passed legislation to protect the investors and homeowners, but failed to out of fear of interfering too much with business.

    This whole situation confuses me. When you turn on the TV or the radio, you constantly here analyists discussing the bailout and the campaign. Both canidates blame the CEOs and to me seem to roughly have the same views on saving the economy. Both want to rescue the housing market and hold Wall Street responsible. I wouldn’t affiliate the economic situation with one particular political party. Although the core of the Republican’s views include a free market system, I cannot say that this is a Republican issue. Both parties are represented in Congress and if they worked cooperatively, they could of prevented this meltdown. For me, Senator Obama has done a better job of articulating the current problems and the methods he would use to combat them.

12. # Patrick Shugrueon 11 Oct 2008 at 3:57 am

    I, too, personally believe that everyone listed above deserves a part of the blame for the severe economic crisis taking hold of our country. Everyone is too quick to point fingers when in fact they hold just as much responsibility as the people that they accuse. It appears that politicians in particular yell at opposing parties and try to discredit each other in a very childish manner which is supposed to “appeal” to the American people; on the contrary, it is hypocritical and elementary to the greatest degree.

    However, despite the fact that blame belongs with everyone, I believe that the majority of the blame should belong to both the people who took loans which they would be unable to pay back as well as the companies who leased this money. It is extremely irresponsible and greedy for banks to give off loans to anyone and everyone without considering the cost. Likewise, it is selfish and downright in bad taste for people to take money with no intention of paying it back, much less paying it back with interest.

    Since the beginning of these recent events in our economy, I have remained completely unbiased because I have come to the conclusion that almost all of these politicians are ambitious truth benders who aren’t accomplishing very much at all. Parties are squabbling over who is to blame when in fact they should be coming together to fix the problem and reboot the economy. Unfortunately and sort of ironically, these people are our country’s leaders, yet they exhibit hardly any leadership qualities. Lastly, neither Obama nor McCain provide much comfort to me with their opinions on the bailout because it seems like neither of them know exactly what they are talking about.

13. # Alex Spinaon 11 Oct 2008 at 9:36 am

    After reading your artcile, it has become more clear to me just what exactly is happening. Now that I think about what is occurring, it just seems like everyone in the public eye related to the economic crisis is just passing the blame onto to one another, never fully accepting the responsability of the issue. In reality it would be impossible for the crisis to have been caused by one person, political group, or financial group. Just as you stated in your article, the true cause of the US’s economic problems had to be from a multitude of poor decisions from multiple people and organizations and the fact that these groups that should be accepting the blame are just shifting it to other groups seems unprofessional. Political parties should not place blame on one another because the choices made by the government are determined by a joint decision between both parties. People who borrowed money cannot be entirely to blame for being too ambitious in their acquisition of loans because the the lenders gave them loans at such low rates in the first place. Also, the FED is to blame because they did not regulate these problematic errors occurring in the US economy. Overall, the problems leading up to the passing of the $700 billion bailout plan were created by a combination of all these issues.

    To be honest, I have been pretty biased against the Republican party for the economic crisis the country is facing. My family leans toward the Democratic side of politics and I’m sure this has affected my judgement on the issue. It just seems like the country, under this particular administration, has made some poor choices and now that this economic crisis has occurred and has been growing over the past year, it seemed logical to place most of the blame on the party running the country. I understand a little better now, however, that this is not how the country got to this point. It was a combination of both parties decisions in addition to decisions made by financial groups and the entire country.

    Again, I guess I’m pretty biased toward the democratic party, so in this particular case I think that Barack Obama gave me the most comfort about how he would help fix the economy, granted neither candidate has really proven to me that they will be able to fix the economic crisis. Also, I do not believe that the economic crisis will be resolved in a matter of weeks or months, which I’m sure many Americans think that the economy could be fixed almost instantaneously. Despite my uncertainty about who exactly will lead the country best, I am still leaning toward Obama and the Democratic party, given the result of the previous administration.

14. # Mike Fladlienon 12 Oct 2008 at 10:36 pm

    Hi Steve, as you noted, pointing the blame removes the responsibility from the pointer. Well done and thanks for helping me teach this.

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