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We have a good example of the difference between capitalist rhetoric and the reality. The US sub-prime mortgage disaster is a real disaster for the finance industry but only a problem for everyone else because they need the finance industry to do business.
Sub-prime Mortgages have been described as NINJA loans. No Income, No Job or Assets. At least that was one of the extremes in the US. It was probably an artifact of capital going into “secure” investments following the stock market crash of 2001 following September 11 and the Tech Wreck (caused in turn by the Y2K problem bringing IT expenditures forward by 2-5 years and then the massive drop-off of spending for the next 2 years.)
With steadily increasing prices for houses, even lending to those who could barely afford payments was not a bad investment. You would be able to sell the asset and recover the money. This even fueled the increased prices by the traditional supply and demand equation.
It took the wars in the Middle East to crash that new kind of investment bubble. Money going into munitions and military expansion rather than into economically productive infrastructure meant that the structure of the economy changed. It meant that employment and real growth were not there to support the virtual economy of the markets. In other words a In economics, market failure is a situation in which the allocation of goods and services by a free market is not efficient, often leading to a net social welfare loss. Market failures can be viewed... More. Not that the markets were unaware. Just that they chose to ignore the facts because it was seemingly in their interests to ignore them.
As long as you insured your investments by hedging and underwriting them you would be able to get away with almost any scale of “correction” then it came. Unless it turned out that even the hedge funds and the insurers were over-extended.
That is how we came to hundreds of billions, perhaps a trillion dollars by the time this is finished of bail outs for private companies by the US Government. When the going is good the owners of the financial institutions make money. When the going gets tough then they lose. Unless it is so bad that you face a 1930 style Depression on a global scale. Then it becomes the Government’s problem. The World’s problem.
In the 1930’s two very different countries had the worst of the Depression. Both were paying off a huge debt due to World War I. Germany were the official losers. They were punished in the Napoleonic fashion by fining them and seizing land. The Depression cause widespread starvation and enough resentment and anger to let Nazism rise. Millions died from starvation and inflation consumed any family savings. If you had real wealth then you were ok. If you were less than rich you were soon poor.
In Australia we had a war debt too. It was to Britain. Britain sent Australia the bill for accommodating and feeding the young men who were sent over to Gallipoli, Flanders and the Middle East to fight for the interests of a group European allies lined up against another lot of their cousins. In return for sending our youth to be slaughtered in pointless charges into mud and machine guns, we got the bill for shells lobbed over their heads, food, clothing and every other thing that accountants could claim. Australia paid dearly again for helping its mother country.
It was paying that debt that caused Australia to be hit by inflation nearly as bad as Germany. To see a large proportion of those veterans who were incapacitated in the war die for want of food or shelter. We paid a third time.
Looking at Germany and Australia now, it is easy to see why there is a much greater amount of financial regulation than in the USA where the Depression was started on Wall Street and where, 70 years later the same thing is playing out – Thank goodness for Milton Keynes and his clear explanation of how Government can prevent a repeat of the Great Depression.