banks

In light of last Friday's discount rate cut made by the Federal Reserve to sooth the nerves of traders and mortgage brokers, a question returned to my mind. This question has puzzled me for quite some time, disturbing my slumber since I was old enough to grasp the seemingly subtle, yet ultimately obvious interaction between business, the government, and people:

Why has America developed an inverted social democracy: a democracy which values the welfare of corporations and other juristic persons¹ far more than that of real persons?

In the previous installment I introduced the lending institutions and practices that sate our country's desire for debt, especially the debt of those who have little regard for the consequences associated with irrational borrowing. In this installment, I wish to examine some of the products that have been introduced over the last decade that have lead to the decline in the financial health of the average consumer. These products were either non-existent before the late 1990s, or in a realm so dangerous that only speculators or the uneducated gambler would have the wherewithal to sign on the dotted line.

In light of last week's stock market selloff, pundits, columnists, and online journalist have in no short order offered insight, analysis, and predictions. Many expound a sky-is-falling mentality, committing the fact that the Dow Jones Industrial Average closed at an all time high above 14,000 points just the week before to ancient history. That was then, this is now, in their opinion.

While not all columnists have taken this view, many are running articles about 'what to do now' or 'safe bets in an uncertain market'. This sort of after-the-fact hindsight bias has been rampant in financial literature for longer than I have been alive and does nothing but reinforce a completely illogical 'buy high, sell low' strategy. This will certainly be the subject of many of my upcoming discussions.

That said, a few of the more in depth online journalists have provided excellent commentary on the underlying economic conditions that have lead to this series of events. It seems clear that to some extent the era of easy and cheap credit (cheap not only in interest, but in ease of acquiring loans) beginning in the 1990s has changed the socio-economic landscape of America and many other westernized countries. The subprime mortgage "meltdown" (as the large media outlets like to term it) that began several months ago has started to creep into prime credit holders and corporate debt.