Thursday, October 09, 2008

Economy Freeze

You want to know the problem with the economy? It's complicated, but here's the basic deal: companies aren't willing to loan out money to other companies because they might have such severe secret debt that the creditor might not get paid back, since the creditee might go bankrupt before they paid the debt back. This is what happened when Lehman Brothers went out of business.

This problem is particularly exacerbated by the fact that in the past few years, companies have been selling insurance against another company going out of business. It was seen as such a safe bet, that everyone did it, and people that were holding insurance would sell a slightly pricier policy to another company, thereby making "free money". The problem is, if any company on the chain of insurance become unable to pay through going out of business, the entire thing goes down. If the entire market went into free fall, these bits of insurance would explode and kill most anything involved in them.

What the government needs to do is what it did in the Great Depression. It needs to go into companies' internal affairs and certify them as being sound. Once the fit businesses are publicly declared as such, it will eliminate much of the fear preventing day to day lending.

The Bush Administration will not do this, however, because it is against regulation or Government interference. This could lead to a global economic collapse. It doesn't matter how much money the Government pumps into the economy, companies will not be willing to loan to each other so long as they don't know who's standing on the brink of a precipice.

1 comment:

Anonymous said...

thank gowd bush will be out soon. what should happen short term is take all that money and just buy hedge funds. give it to the gov and make some jobs. the loans are off the companies back. i dont know, i am not an economist but it is apparent that the govnt must do something otherwise nothing will get done. i believe free market works but i also believe mods of ppl are stupid.