Friday, October 10, 2008

Counterfeit Life Part two: Mistaking "insanity" for "equality".

The government bail-outs haven't worked and our economic system may be in collapse. I heard the author of The Fourth Turning state that out of disaster comes new systems that work, while the old dead wood is swept away. Even though I might be one of the victims of the next "depression", I say: this fire will burn up the missteps of political correctness, THANK GOD!

This generation is beginning to wake up to our "Great Depression of 2008". Using back-of-the-envelope figures, I'd estimate the stock market has lost around 40% of its October 10, 2007 value. For every $100 you had in 2007, you now only have $60. It looks like our world as we've known it is about to become globally centralized and geographically nationalized.

How did we get so screwed up financially? Noble desires were made into ridiculous laws. Its not fair that poor people are denied the "experience" of home ownership. It is also unfair that people who are severely disabled are prevented from the "experience" of a mainstream education. So, laws were drafted to "right" these "wrongs".

Enter the law of "unintended consequences", or the "oops" factor.

Laws went through forcing institutions to lend money to under qualified applicants. Laws were also passed to force most disabled students into the main stream school system. For the world of finance we now have loan swaps, which have brought Wall Street firms to their knees. In the school system, entire classes are disrupted for the sake of the "rights" of a single student, who by common sense should be in a different educational situation.

In short order we will all have to handle problems we'd only read about in history books. All the "fluff" of our economic and spiritual lives will be squeezed out of us due to harsh financial realities. It won't be easy, or pretty. But after a natural ground fire in a forest, burning away the excess undergrowth, new life emerges from the ashes.

We tried to argue with what the 1929 survivors of The Great Depression learned. They realized that completely unregulated anything was a bad idea, as there is always someone who attempts to defraud, and or is dangerously reckless. They focused on their financial system and erected barriers and restrictions to prevent a repeat of what they'd just come through.

We also decided that, since our generation was somehow more far-seeing and noble, to throw out what used to be thought of as "common sense" business and educational practises. If you didn't have a certain amount of real money and a good credit track record, you couldn't get a loan for something huge, like a house. If your disability was so severe as to require one-on-one attention, you were placed outside the average classroom environment.

This fuzzy-thinking got all mixed up with another concept. The very real and different problem of prejudice. If a black family and a white family have the same amount of assets and the same good credit record, both should qualify for and be able to purchase a house. If not, prejudice is involved. That is immoral and has rightfully been legislated out of  "official" existence.

If a person's disability can be managed in such a way that the general learning environment isn't destroyed for the rest of the class, that disabled person should be allowed to attend a regular school classroom. If that qualified disabled person is banished to some other type of learning environment, prejudice has reared its ugly head and rightfully, legislation has been passed to right this particular wrong.

But now enter fuzzy thinking. The white family has an unfair advantage over the black family due to our dreadful past history of "sort of" civil rights. Therefore, ANY family, even those with few assets and a poor credit track record should be given the chance to have a house anyway! This is business suicide. Experience taught business what an average "bad credit risk" does. They usually end up in default. That means the bank doesn't get paid back and they have to re-sell the home at a loss.

The fuzzy thinking in education now mandates that All people with disabilities, with very few exceptions, shall be mainstreamed. So a child who is emotionally unable to control his tendency to scream is put into a 30-student classroom where an overworked and totally frustrated teacher, attempts to "teach". This is insanity, not equality. Sadly this issue has been swept from public consciousness due to our current financial woes.

What were the lenders supposed to do with this "mandated" bad debt? It was now law to run their businesses in a "risky" manner. Someone figured out how to gather a groups of mortgages together in a loan package which could be resold. There were "some" bad loans in the package, but most of it was "good" debt. With deregulation, the overall package was rated AAA and everyone ignored the small amount of bad debt that came with this thing called a Loan Swap.

Because old limits and restrictions had been removed, banks who used to be prevented from playing around in speculative markets with depositor's monies, now could roam free. It used to be that there were two different kinds of banks. A depositor's bank, where you put your money in a checking or savings account and when you want to get your money back out of the institution, at any time, you got your cash returned to you.

The other type of bank was an investment bank. This bank worked in a riskier environment and people who had brokerage accounts at this type of institution realized the difference. This bank had investment accounts instead of deposits. These investment accounts purchased stocks and other "investments". Once you were in play in this arena, you generally moved your money into and out of different stocks, making and losing money as the market ebbed and flowed. It was possible to lose all of your money.

A depositor, on the other hand, was protected from the problem of going to his bank and being told that his money was gone. With the evaporation of former barriers, basically, all hell broke lose, when the bad debts started cascading through the system. Because the bad debts were mixed in with good debts, nobody could accurately estimate how much bad debt they were carrying on their books. This is what caused the banks to stop trusting each other. The interest they charged one another began to skyrocket and then the markets went into free fall.

As of today (Friday, October 10, 2008) international leaders are seriously considering shutting down markets, world wide and re-writing the rules of investing. Instead of a bank "holiday" we may be looking at a Market Holiday. All of the "fixes" tried so far have not stopped the worlds markets from crashing.

I know the next months and possibly years will be difficult. I also know that a lot of our former fuzzy-thinking will be burned away with the current financial ground fire. Once again, whether in finance, or education, our generation will come to understand what past generations painfully learned. The harsh realities: "No, this time won't be different", "wishing don't make it so" and "people have to be protected from excesses".

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