Well, the political rhetoric is heating up, the bailout package has passed, and no one knows if that’s a good thing or a bad thing. And let me tell you, I don’t know either; anyone who says they do is either lying or delusional. Economics had just gotten far too complicated for even economists to truly understand.
Take naked short selling for example. Short selling is where you borrow stock from someone else, sell it, and later you pay them what the stock is worth at that later time. Basically you’re betting on the stock going down. Naked short selling is the same thing, except you don’t borrow the stock before you sell it. Instead, you sell it, and then later you buy the stock at the price it is at that later time from someone and give it to the person you sold it to. Again, you’re betting on the stock going down, but this time in a different method. And this is one of the simpler things going on these days in Wall Street.
I mention this because shortly before they announced the details of the bailout, the Bush administration decided to ban naked short selling, saying it was driving stocks down even further than they should be. They made no mention of how naked short selling is any worse than plain short selling even though both involve betting on the stock tanking.
If I’ve lost you, hang on a moment, because I’m going somewhere with this. I’m going to show that where we place the blame is just as complicated. If you’ve been reading this paper recently (and if you’re reading this, I think that’s a good assumption), you’ve read a lot of articles blaming the government for this disaster. I think that’s a bit simplistic.
The major impetus of sub-prime loans according to many was the Community Redevelopment Act which was passed under the Clinton administration and encouraged lenders to offer mortgages to less qualified applicants than usual. The problem with this assumption is that it assumes that Clinton alone passed the bill by fiat with no input from Congress. There was, in fact, a significant input by Congress (Republican-dominated at the time) which stripped the bill of much of its oversight. Now, consider what is likely to happen when the government mandates something, but doesn’t monitor that something for any corruption or misuse of its provisions. Also, consider that no one forced giant mortgage companies to give out so many sub-prime mortgages or to sell them to each other like candies until no one was actually paying attention to the individual’s ability to pay. As you can see, there’s plenty of blame to go around
Troy Kuersten is an aerospace engineering and physics senior and guest columnist for the Mustang Daily.