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Thursday, September 25, 2008

Economics

I do not know much about economics. That needs to be stated from the beginning. I know we're in a lot trouble right now and I am seeking to understand the consequences but my learning curve is large. What I have realized however is that this tough economy is not really hurting people who have comfortable lives, like me for instance. I have not had to change my lifestyle in order to adjust to the economic circumstances. I can still buy food AND gasoline AND pay my bills. Any loss I've incurred is a paper loss that I will likely recover over time. To our credit, my husband and I live within our means. We are lucky that our means allow us to live a nice life, but even so, we carry no debt whatsoever and I feel pretty good about that about right now. But, there are many in life who are devastated by the rising costs of food, shelter, energy, and gasoline. They are having to make choices about what to buy and how to life. Taking a vacation is the farthest thing from their mind. They'd just like to take their kids for an ice cream cone once in awhile and even that has become hard to do. A struggling economy prevents the rich from getting a lot richer but it doesn't often prevent them from living well. A struggling economy cripples the poor with burdens they often can't bear and end up needing assistance. Conservatives say that the government shouldn't bear that burden. The private sector should. OK, but who's doing it? Especially when the government has in part created the burden.

It has been interesting to note the role that Sweden seems to be playing in the current economic crisis that the U.S. is facing. Apparently back in the 1990's Sweden faced a similar meltdown and have therefore been called upon to offer their perspective on how they returned their economy to a robust place. The International Herald Tribune ran an article on Tuesday that helped explain the situation. The center piece of the newspaper article highlighted the differences between the way in which Sweden "bailed out" its banks and the manner in which the U.S. Treasury is proposing we do the same. The paper reported the following: "Sweden did not just bail out its financial institutions by having the government take over the bad debts. It also clawed its way back by pugnaciously extracting equity from bank shareholders before the state started writing checks. This strategy kept banks on the hook while returning profits to taxpayers from the sale of distressed assets by granting warrants that turned the government into an owner." My understanding of the current situation is that in America, under the current suggestion, it is the shareholders who stand to lose the least and the taxpayers who stand to lose the most, the total opposite of the Swedish solution. Swedish officials say that "the tough approach toward the banks paved he way for success. It eliminated a "moral hazard", the problem of relieving investors of bad decisions. The demise of shareholders also underpinned the political consensus that helped restore stability to financial markets even before the bailout was fully under way." Putting taxpayers on the hook without offering anything in return could be a mistake, said Urban Backstrom, a senior Swedish Finance Ministry official. "The public will not support a plan if you leave the former shareholder with anything."
I don't fully understand why the shareholders should be protected. Plain and simple, the stock market is a gamble. Now when in Vegas, if you place a bet and it goes bad, the House does not let you off the hook. They don't care if you are rich, and therefore basically unaffected in your lifestyle by the loss of money, or if you are poor and end up hawking everything you do own and living in your car, or worse, a cardboard box. Why protect the gambler? That's why the stock market has high risk options and low risk options. The high risk options can earn you a lot of money but can also cost you. I just don't understand why the U.S. is so afraid to have rich people lose some money while the common person is losing their house, car, and shirt.
We need to do something, but there also needs to accountability and the losses should be shouldered by all involved and the gains should be returned to the taxpayer in some measure.
OK...enough ranting about something I'm still trying to understand. In this case I have to say however, listen to Sweden. Their plan worked.