So how did we get here?

How did we get to the financial mess we are in? It is being asserted by some people in the political world that unfettered capitalism caused the mess we are in. Many people believe it is the deregulation of the banking industry.

One word is how we got here. Consequences!! Members of both parties in Congress have embraced market economics, but only so far as markets keep raising. That is not market economics. Nothing could be further from the truth.

Since Fannie and Freddie are backed by the government investors believed there was no downside to investing in mortgage backed securities. They knew that when the bottom fell out, and it had to fall out, the government would step in and make it whole. They were right by the way. Since the government would be standing there to bail things out there was no reason to temper their enthusiasm to take on risk.

Mortgage applicants had no reason to temper their enthusiasm. Fannie and Freddie programs were pushing money. The higher the loan the better the deal. Ability to pay never entered into the equation. Money was cheap and the sky was the limit. The government has not yet become the knight in shining armor yet for individual mortgage holders but both candidates are pledging to do just that. Once again no reason to hedge risk because they will be bailed out.

Where the upside is high and no risk needs to be factored in, buy buy buy!

Here is another case. Through the summer speculators bought up crude futures to all time highs. The Democrats and more populist Republicans said the answer is to ban speculation. What excessive speculation tells us is this, either all these traders knew something we didn't. Either they had inside information, which there is no evidence of, or they saw something in the trends that showed them that downside risk was low. What did these traders see? They saw continually upward demand curve with flat supply curve. Why is the supply curve so flat? Foreign oil operators see no reason to increase supply. Our domestic supplies are off limits. Off shore drilling and ANWR have been put in a lock box. If we began to develop our resources they would feel the need to increase supply. Given the fact however that many of these sources are glad to see the United States squirm and they know with certainty that we will not allow domestic stockpiles to be developed why would they limit their ability to enjoy high incremental rates? They have a nearly sure thing. Speculators see this and see the same thing. Nearly no downside risk., Why not bid it up. The trend down did not start until President Bush reversed his executive order and put pressure on Congress to do the same. Without a drop of crude being pumped the speculation slowed. The downturn in the economy and the end of the peak driving season took care of the rest.

So what happens to us from here? I am not an economist nor play one on TV, don't use this advice for investing purposes. I believe given the meddling that has been done with the addition of horrible tax policy that an Obama White House would implement with the help of the Democratic Congress that will almost certainly happen in the upcoming election, I see a long down turn. I believe it will be a deeper recession that we have experienced recently, but not depression. The tax rates even under Obama will not cause a capital strike like we saw under Roosevelt. As long as Obama does not do more and more to declare war on business entrepreneurs will prevail and we will have recovery, just not as quickly as we could under a pro growth president and congress.

The important thing to understand is that markets did not cause this, only politicians trying to take logical consequences out of the outcomes. Markets will bring us out but probably despite the progressives best efforts to crush it.