As an options and currency trader, I'm had to learn a little about economics over the years, and in fact, the study of money, how it works and why, has been a consummate passion since I was a kid.
To be a successful trader, it's imperative you understand some basic things about economics, so for what its worth, here is my take on the financial crisis, how we got here, and a few ideas for a solution.
When Regan got elected president in 1980, he immediately did three things that planted the seeds of destruction that has finally come home to haunt us.
It was only a matter of time, because in all the years since, no administration has done anything to change the infrastructure of the banking system and how real estate financing and ownership is done in this country First, he hired Arthur Lafter as chief economist, a proponent of supply side economics.
A school of economic thought that theorizes that by designing the financial infrastructure to give favorable treatment to corporations and businesses, their increased profits would "trickle" down to the middle and lower income classes, thereby raising their status and prosperity in life.
He was laughed at by most major economists around the world; some calling it "voodoo economics.
And they were right.
Instead of business with a conscience, what the corporations did with their new found wealth was buy up other companies, not redistribute the wealth down to employees and/or citizens that needed it most, the working poor.
Two.
For trickle down economics to work, Regan insisted that government needed to be massively deregulated, so he lifted most of the checks and balances on the financial institutions, thereby granting banks and savings and & loan companies almost unlimited power to create creative mortgages to allow marginally qualified people to buy homes, including adjustable rate mortgages, reverse mortgages, and interest only loans, etc.
But, wasn't that a good thing, you might ask? It would be if it wasn't for two factors.
One, adjustable rate mortgages and their cousins are the biggest ripoff of the America home buyer that has ever existed.
And two, what they perpetuated was run away home values and fantasy appreciation.
But the camel that broke the straws back was (Three) In 1987 he passed the Real Estate Reform act, thereby eliminating provisions that made it easy for homeowners to buy property through assumable mortgages.
Reasoning that by making home ownership freely accessible to middle and lower income people, it would destroy the value base of property ownership in this country.
A base that's carefully preserved by certain government agencies, developers, financial institutions and the real estate industry.
Now all financing had to go through a financial institution, at least in theory.
But the real estate gurus got more creative.
They found ways around the new laws but at the cost of the mortgage industry loosening their criteria of credit and income to prospective buyers.
That, coupled with speculators and agents/brokers raising prices of every property they turned over, soon had property appreciation rates soaring to new heights of fantasy.
We have been going on trickle down economics ever since, more or less and it's been the biggest disaster ever, ranking right along side communism as a failed economic and social experiment.
Property ownership is the foundation of our country, but the foundation starts crumbling when home ownership becomes a financial liability instead of an asset.
By the use of unfavorable tax laws, high finance costs and odious property taxes, home ownership today is not the American dream.
It's the American nightmare.
The bursting of the real estate bubble and the credit crunch are only two domino's on a tabletop of problems.
They are only symptoms of a much bigger disease.
Our banking system.
The Federal Reserve is a story all its own.
To some, a comedy, to others, a horror story, and to others still a book of witchcraft.
Its true, some buyers should not have been given mortgages to buy the homes they did in the last 5 or 6 years, because the agents, brokers and lenders knew they couldn't actually afford them, but I believe they did so, not so much out of greed but because they too had bought into the fantasy that real estate would continue to appreciate.
As a consequence, home prices far outstripped the wage/price ratio that normally determines home values.
The bailout is not going to work until or unless we correct the underlying root causes, and that is the way real estate estate is valued, bought and owned in this country.
What we need is not a huge band-aid, but a change in the economic philosophy that our entire free enterprise system is based upon.
Particularly the banking system and the runaway derivatives market.
So here are my ideas for what we should do.
One-we need something like a national rent control board to determine home prices and values.
If we truly want to make home ownership a possibility for middle/low income people, (the only way to rebuild a strong middle class) we need strict regulations that prevent unscrupulous agents from taking advantage of unknowledgeable buyers.
Repeal of the Glass-Steagall Act (which allowed banks to package and resell their mortgages/loans to third party investors), which has been called the single biggest cause of the great depression of 1933.
Creative programs that would allow lower income people to buy, and much more favorable tax credits for people desiring home ownership and willing to be stable and hard working to get it.
Two- An overhaul of the credit card companies and the outrageous interests rates they charge; along with the credit reporting agencies.
They have far too much power over the American consumer.
We have an economy based on consumer spending, and that means readily available credit to almost anyone with a job.
When credit is denied to individuals or businesses, the economy comes to a halt-like exactly what is now happening.
If we want to keep going on a consumer spending based economy, the rules will have to be changed.
Not loosened or tightened-changed.
Three- a flat tax, or a luxury tax would effectively change the infrastructure of our economy.
Number one, the values of homes would immediately go down to their true market value.
Two, people would be encouraged to save, not spend.
The way the system is now, we are penalized for savings, not rewarded.
Three, to rebuild a strong middle class, if its not going to be based on readily available affordable credit, there must be readily available work at decent wages-something we have been exporting for 30 years now, and that must immediately change.
To be a successful trader, it's imperative you understand some basic things about economics, so for what its worth, here is my take on the financial crisis, how we got here, and a few ideas for a solution.
When Regan got elected president in 1980, he immediately did three things that planted the seeds of destruction that has finally come home to haunt us.
It was only a matter of time, because in all the years since, no administration has done anything to change the infrastructure of the banking system and how real estate financing and ownership is done in this country First, he hired Arthur Lafter as chief economist, a proponent of supply side economics.
A school of economic thought that theorizes that by designing the financial infrastructure to give favorable treatment to corporations and businesses, their increased profits would "trickle" down to the middle and lower income classes, thereby raising their status and prosperity in life.
He was laughed at by most major economists around the world; some calling it "voodoo economics.
And they were right.
Instead of business with a conscience, what the corporations did with their new found wealth was buy up other companies, not redistribute the wealth down to employees and/or citizens that needed it most, the working poor.
Two.
For trickle down economics to work, Regan insisted that government needed to be massively deregulated, so he lifted most of the checks and balances on the financial institutions, thereby granting banks and savings and & loan companies almost unlimited power to create creative mortgages to allow marginally qualified people to buy homes, including adjustable rate mortgages, reverse mortgages, and interest only loans, etc.
But, wasn't that a good thing, you might ask? It would be if it wasn't for two factors.
One, adjustable rate mortgages and their cousins are the biggest ripoff of the America home buyer that has ever existed.
And two, what they perpetuated was run away home values and fantasy appreciation.
But the camel that broke the straws back was (Three) In 1987 he passed the Real Estate Reform act, thereby eliminating provisions that made it easy for homeowners to buy property through assumable mortgages.
Reasoning that by making home ownership freely accessible to middle and lower income people, it would destroy the value base of property ownership in this country.
A base that's carefully preserved by certain government agencies, developers, financial institutions and the real estate industry.
Now all financing had to go through a financial institution, at least in theory.
But the real estate gurus got more creative.
They found ways around the new laws but at the cost of the mortgage industry loosening their criteria of credit and income to prospective buyers.
That, coupled with speculators and agents/brokers raising prices of every property they turned over, soon had property appreciation rates soaring to new heights of fantasy.
We have been going on trickle down economics ever since, more or less and it's been the biggest disaster ever, ranking right along side communism as a failed economic and social experiment.
Property ownership is the foundation of our country, but the foundation starts crumbling when home ownership becomes a financial liability instead of an asset.
By the use of unfavorable tax laws, high finance costs and odious property taxes, home ownership today is not the American dream.
It's the American nightmare.
The bursting of the real estate bubble and the credit crunch are only two domino's on a tabletop of problems.
They are only symptoms of a much bigger disease.
Our banking system.
The Federal Reserve is a story all its own.
To some, a comedy, to others, a horror story, and to others still a book of witchcraft.
Its true, some buyers should not have been given mortgages to buy the homes they did in the last 5 or 6 years, because the agents, brokers and lenders knew they couldn't actually afford them, but I believe they did so, not so much out of greed but because they too had bought into the fantasy that real estate would continue to appreciate.
As a consequence, home prices far outstripped the wage/price ratio that normally determines home values.
The bailout is not going to work until or unless we correct the underlying root causes, and that is the way real estate estate is valued, bought and owned in this country.
What we need is not a huge band-aid, but a change in the economic philosophy that our entire free enterprise system is based upon.
Particularly the banking system and the runaway derivatives market.
So here are my ideas for what we should do.
One-we need something like a national rent control board to determine home prices and values.
If we truly want to make home ownership a possibility for middle/low income people, (the only way to rebuild a strong middle class) we need strict regulations that prevent unscrupulous agents from taking advantage of unknowledgeable buyers.
Repeal of the Glass-Steagall Act (which allowed banks to package and resell their mortgages/loans to third party investors), which has been called the single biggest cause of the great depression of 1933.
Creative programs that would allow lower income people to buy, and much more favorable tax credits for people desiring home ownership and willing to be stable and hard working to get it.
Two- An overhaul of the credit card companies and the outrageous interests rates they charge; along with the credit reporting agencies.
They have far too much power over the American consumer.
We have an economy based on consumer spending, and that means readily available credit to almost anyone with a job.
When credit is denied to individuals or businesses, the economy comes to a halt-like exactly what is now happening.
If we want to keep going on a consumer spending based economy, the rules will have to be changed.
Not loosened or tightened-changed.
Three- a flat tax, or a luxury tax would effectively change the infrastructure of our economy.
Number one, the values of homes would immediately go down to their true market value.
Two, people would be encouraged to save, not spend.
The way the system is now, we are penalized for savings, not rewarded.
Three, to rebuild a strong middle class, if its not going to be based on readily available affordable credit, there must be readily available work at decent wages-something we have been exporting for 30 years now, and that must immediately change.
Source...