I don't have to tell anyone that the economy in it's current state is of an immediate concern to each and every one of us. So when the presidential candidates started strutting their stuff about what they are going to do to fix our tanking economy, we all sat forward in our seats and listened. But what did we hear? I know that the first thing I heard out of both candidate's mouths when the hot topic of economy was brought up was to point out that it was bad, and that the American people knew it was bad. Doesn't it make you feel special to know that they know that you know? OK, moving on. Both of the candidates listed off a fair amount of things that they intended to 'fix', a rather ambiguous term, I'm just saying.
Here is the list recited by Obama: The government needs to create road and building projects which will in turn create jobs, there needs to be decreased taxation on the middle class, health care needs to be reformed, energy needs to be addressed, the rescue package needs to be watched and regimented so that it is put to proper use, and all companies that receive rescue packages must follow a set of guidelines for the use of that money, and extraneous expenses brought about by lobbyists need to be put to a halt. Cool, if he maps out a definite way to make these things happen, right?
The list according to McCain: America needs to accomplish energy independence and not be sending so much money to foreign countries that don't like us that much in the first place. All taxes need to be kept low, government spending needs to be reigned in, and here's the part that scares a lot of people and businesses- McCain wants to order the secretary of the treasury to buy up all of the bad home loans and renegotiate those loan payments.
Maybe some of you reading this don't know why that's a bad thing, so I'll make an effort to explain, and that way we can also go back to the beginning- where the economic crisis started- so that we can make some conclusions about the root of the problem and maybe the things that need to be done.
OK, so when you deposit money into a bank, they take a portion of that money and sell it back to the public as a loan. They sell these loans to people with good credit so that they can reasonably guess that these people will pay them back, with a little interest. So far so good. Then a new concept was created when banks decided that they could sell the loans- so the money that was promised to them, they could sell that contract to somebody else, and when that company got that money that was the loan, they would also pay the bank back. This creates liquidity. Well when America started getting foreign investors to do business here, the influx of cash to the banks made them more bold. The banks decided they wanted to appeal to the less fortunate demographic, so they start lending out to people with lower credit scores, but because they are riskier, the banks can ask for more money up front. They also sell these loans to companies, but at a discount, unstable as they are. And with these less reliable loans, they got to adjust their interest rates on people. At first, people are excited that they can finally get loans, and everyone wants to buy a house. Home prices go up because of the demand, and people think that because of the way things are going, it will be easy to pay off their mortgages. But home builders got excited to the point where they built more homes then there were home buyers. Home values go down because supply suddenly exceeds demand. Meanwhile, the banks have lent to subprime, or extremely risky loans. And they increase their interest rates on these people who were a high risk to begin with, so most of these people default. Well, these people were on mortgages, so the bank thinks that they can just take their house and not lose any money. But home values have dropped. And the subprime loans that they gave out, they also sold to businesses. But there's no real money for the businesses to ever gain. And here we are.
This effect spread across the globe as American businesses went into debt with the foreign powers that they chill with. So now this is not just our issue. But how would anyone begin addressing this complicated mess? The problem with McCain's proposal is that at first, the national debt will shoot straight to hell, drowning in unpaid loans, while the treasury negotiates rates that people can actually pay off. Where will the money come from in the meantime? No answer can be a good answer for the economy in the short term.
Obama is right to say that some taxes must be raised, and it was a good move propose to only increase taxes on the wealthy. But how does he intend to fiercely oversee the use of the bailout money without ruffling some feathers with whatever policy he imposes? And McCain wins the title for most decisive position on what action to take. But will the treasury be flexible enough to hold it's own while attempts are made at a loan policy that will please all? I don't pretend to have the answers to these questions, but I hope a few of you have a better understanding of the situation from this point forward so that you can make more informed decisions.
Sources:
the second presidential debate of 2008
http://media.www.thebottomlineonline.org/media/storage/paper1077/news/2008/10/01/News/Economic.Crisis.101-3458676.shtml
http://biznik.com/articles/financial-crisis-101-the-way-it-works
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