The AIG controversy gave slimmer of hope to American population to finally lay blame of current credit crises on someone. Alas, the pop fizzled out so quickly that the joy of revenge didn’t last long. Traders based in US returned their money and traders based in Europe didn’t even bother to take notice of this hoopla. After spending or rather printing, literally, two trillion dollars, getting $80 million back into government coffers was like dark comedy. But it shows the lack of understanding regarding current crises amongst the masses. Worse it shows how US government is running out of any better ideas to pull economy out of trouble. The current debacle in the financial market not only shook the very foundation of financial hegemony of US over rest of the world but it dealt severe blow to the American swagger that they are pioneers of finance wizardry.
It’s easy to blame the whole trouble on few people on Wall Street. They were greedy and they did stupid stuff. But technically speaking none of that was illegal. Unlike in Enron- where the top management was deeply embroiled in cooking books- here, the whole credit cycle process as well as Securitization processes was absolutely legal. Now whether that structure was sustainable or not is a different question. (It wasn’t!) That makes average Joe (common man in US lingo!) is confused that if he is loosing his pension plan and on the verge of loosing his job then how come the techniques that brought down the house is legal? The answer is not that simple. The game has been going on for long time and our average Joe inadvertently ended up playing a major role.
The American economy has been reshaped into a consumer based behemoth that gobbles everything and anything produced around the globe. The insatiable demand wasn’t fueled by higher earnings but rather illusion of earnings. People were borrowing heavily for everything. Right from the clothes to house everything was paid by credit. The credit cards were thrown at people like fliers. The houses were made available to everyone. And all though availability of resources and luxuries to everyone is a noble goal, the bitter truth is that the responsibility was bartered for greed. The saving rate was in negative – a fact lawmakers as well as general populace should be worried about. But not in this land of free! The definition of freedom was twisted in such an ugly manner that government in fact supported this binge consumption on borrowed money. And, why not, the government itself was borrowing money from foreign countries by selling debt to them. The chief of Federal Reserve was spreading the euphoria by telling everyone that this kind of debt restructuring (including securitization) is heralding new age of prosperity to American life. The first part was indeed true, the second, not so much! People borrowed more money by putting their houses as collateral. ‘Flipping’ houses became rage. Folks with no knowledge of financial juggernaut behind housing market or for that matter housing market itself bought houses after houses. In the initial years huge profits were made. But the simple rule of supply and demand is like gravity. It always catches up with you and brings you down. Usually with the loud thud!
The juggernaut didn’t just stop there. Financial firms got into the business they didn’t understand either. Creating securitization business, selling CDO’s, CDO’s of CDO’s, tranching, slicing, creating SPE and then buying insurance to find solace went on for really long time. With limited number of players in the market (both in terms of buyers and sellers) they effectively traded with each other creating a manor of cards. The house was meant to come down.
In short it’s all most impossible to pin-point a culprit. If Americans want to know who is the culprit then they need to stand in front of mirror and open their eyes. The reflection ain’t that pretty!
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