The True Problem with the Global Economy

Congress' shiny new $700 billion bailout fund (which in reality is more like a $5 trillion bailout fund, because government always overpromises AND overspends) treats only the symptoms, not the causes of the economic crisis.

To find the cause of the crisis, the heart of the crisis must be indentified, and then why must be asked enough times to get to root cause.

Right now the true crisis is not the fall in the stock market, or problems with mortgage based securities. The heart of the crisis is that credit is being choked off to businesses and consumers. This causes purchases to fall and businesses to shrink by laying off workers. Why is this happening?

First, because banks are spooked by losses they are taking on mortgages. Why are banks taking losses on mortgages?

Because the investment vehicles that banks were holding, many of which were subprime (ie. riskier), are not worth as much on the market.

Why aren't they worth as much? Because the credit agencies that rated them decided they weren't as secure as they initially thought and dropped there ratings, thereby spooking investors.

Why did the credit agencies decide that they weren't secure? Because people were starting to default on their mortgages.

Why were people defaulting on their mortgages? For a variety of reasons. The main reasons were:

• Adjustments to adjustable mortgage interest rates, causing payments to go higher
• Inflation of necessary goods such as food and gasoline
• Stagnation of wages

The first problem is superficial. Most people can refinance their mortgage. If they can't because of onerous contracts, legislation or regulation can address this.

The second problem, inflation in the cost of necessities cannot be easily addressed without destroying free markets.

The third problem is the true underlying cause of this crisis. First because it would mitigate both of the other issues, and second, because it is the ordering factor on which the economy is built.

When real median incomes stay stagnate, or drop, the economy stalls. In other words, when workers aren't taking home raises, they end up getting priced out of their next big purchase.

Why aren't workers getting raises, or worse, losing their jobs? Foreign competition. Companies ship production and engineering overseas to save on wages. Even if big businesses don't ship a job overseas, they use the implied threat of off-shoring to keep a lid on salaries. Suggestions on what can be done about this coming soon.