Explaining The Financial Mess

For those of you trying to follow what is going on, there is no better place to start than these introductories: here and here, along with commentary by leading economists here.

I will update this post periodically when I find other interesting articles. Enjoy!

Update: Megan McArdle explains the limitations of regulation.

Update: For up-to-the-minute commentary on the mess, I’d recommend Megan McArdle at The Atlantic, Arnold Kling of EconLib (who used to work for Fannie Mae), Berkeley Professor Brad DeLong, Tyler Cowen of Marginal Revolution, and Felix Simon’s Finance Blog.

Update: Winterspeak’s blog is essential in understanding the back and forth of the above blogs, see here.

Update: Economists as a whole speak. Read their open letter to congress.

Update: Bruce Bartlett makes the case on why bailing out the financial sector is very different than bailing out the auto industry, and, more importantly, why its important the bail out goes through. See here.

Update: Robert Shimer, professor of economics at the University of Chicago, explains why we are in the mess we are in, see here.

Update: An outline of many events leading to the financial mess here. The role credit agencies played here.

14 Responses to “Explaining The Financial Mess”

  • from Heconomics…………
    “The arguments-on-principle against a bailout are strong. For one, the taxpayers will ultimately foot the bill in one way or another for the poor decisions of Wall Street millionaires. Also, bailing out companies collapsing after huge gambles fell short creates a moral hazard that encourages such imprudent behavior in the future, both for these companies and for others. But what politician is going to stand on free-market principle when faced with unspecified “total chaos?””



    I see how it’s important to bail out greedy millionaires so they don’t lose their many mansions while the average Joe who is losing his one home, has to pay increased taxes to keep the millionaire gainfully employed. I guess this is what free-markets are, the rich reap the profits and the poor get to share the loss.

  • This isn’t exactly a comment but after two weeks of researching, I wrote a simplified interpretation of what’s going on with all this bailout business and was hopinh you could either critique it, add it to the list of blog entries regarding the financial cesspool we’ve stepped into, or both.



  • Good links to information about the current financial mess, they were not politically biased like so many other articles I have read. Here is another blog you might enjoy.


    If I remember correctly I found the blog below from your site, but I quit taking the blog seriously because of the obvious political slant and blaming democrats for any and every problem. Any blog which attempts to tell me why Sarah Palin is qualified to be a heart-beat away from the presidency loses all credibility in my eyes. I vote based on the candidates experience and qualifications – the V.P. is not a popularity contest.


  • Obama said:


    As a Mexican I will NOT VOTE FOR OBAMA a guy who believes it’s okay to take our vote, but won’t give us a job if that job can be given to an African American.

    We need a President we can trust and who is going to be for ALL of us, not just the selected few.

  • “The V.P. is not a popularity contest” With that remark Obama is automatically eliminated from the Presidential race. All he is is a media created fraud with no actual experience of having to make executive decisions on a city, state or federal level. He has used his entire time in the Senate running his campaign for President and not participating in Senatorial voting. All of his votes were a vote of “present”. By not voting on anything, it kept him on safe ground so he wouldn’t get on anyones bad side. Staying neutral kept him safe. So, by your reasoning, if Palin is not qualified, neither is Obama.

  • When did this post became a soapbox for the debate regarding the Presidential election? I mean, I know both candidates are addressing the bailout issue in their rhetoric, but the focus of this post is to attempt to make sense out this whole finance industry shitstorm.

    Can we please keep the debate on this above-mentioned issue? I’m sure there are more appropriate posts on HP where the Vice Presidency can be discussed.

    Speaking of which, have you noticed how this nitwit Naomi Klein has capitalized on all this? She seems to be confusing the collusion of corporate lobbyists and our crooked Congress with a “laissez faire” society. She’s written a book on this and even appeared on Bill Maher’s show last week. I wonder how much money’s she being paid from the “evil corporation” who published her books?

  • WTF,

    True – but what do you think about the “too big to fail” argument? should we just let them fail and risk a great depression like recession? I’m not arguing either way, my only point is that you have to look at both arguments.


    Good article. Shows your passion. 🙂 You might be interested in this article, and this one.


    Wow…thats a bipartisan link you have there. Robert Reich is arguably the most liberal economist in the United States and Mark Perry is probably one of the most conservative. Reading both, as I do, is sure to be enlightening and I strongly encourage it.

  • Hey HP,

    I’m glad you liked my latest entry. Thanks for the compliments. Would you agree that the government’s move to bailout these credit and insurance giants in exchange for equity is similar to Rule #5 in the Communist Manifesto, which is to make the State a monopoly in the national credit industry?

    I mean, China and Venezuela both have a sizeable amount of equity in nearly all of their countries’ major industries. I seriously feel the United States is creeping into this direction.

    As for the two articles you suggested, the Bloomberg article suggesting the Democrats are solely at fault for the current economic crisis is ridiculous. Surely, the Republicans who have dominated Congress and the White House for 8 years cannot claim to be an innocent party in all of this. And what about Bush’s “Ownership Society” speech from 2003, after which Fannie and Freddie began authorizing mortgages to almost anyone who applied for them?

    Perhaps instead of framing the 2004 Presidential debate on gay marriage and who did what in the Vietnam era, George Bush could’ve focused on this issue instead. The failure of the Republican-dominated Congress to remove the GSE status from Mac and Mae is their fault. Both parties are to blame in all this.

    As for the Wall Street journal article, I do agree that Mae and Mac and Congress is to blame. But as Andrew Sullivan said last week on Bill Maher’s show, no one was ever forced to sign a mortgage they couldn’t afford to pay.

  • Oh yeah, everybody had their role to play – including, I would add, the push for more minority ownership, see here.

  • True – but what do you think about the “too big to fail” argument?

    Frankly, I wonder if “too big to be allowed to fail” should not be substituted with “too big to be allowed to exist”. And I hasten to add the pre-emptive argument that being anti-monopoly is not equivalent to being anti-free-market.

    Just a thought.

  • Eyes of Texas is entitled to his/her opinion, but not to his/her own set of facts.

    The reality is that both Obama and McCain have been AWOL from the Senate a good part of the time while campaigning, as is normal for Presidential Candidates, but McCain has been indisputably more so – having now not been present at one single roll call vote in the Senate since April.

    According to Congressional records, McCain has missed 61% of the votes in the 110th Congress, whereas Obama has missed only 46%.

    See Here

    I’m sorry – I tried to ignore this, but it was just such an obvious lie that I could not. More often then not, when I see outrageous lies like this repeated in obvious “talking point” style, I just roll my eyes and mentally dismiss them, assuming that (like me) no one can possibly be taking this stuff seriously. But maybe that’s a mistake. I don’t know.

  • LaurenceB,

    I’ve thought about the same thing. If we are going to bail out companies that are “too big to fail” then we really should in the future, for the sake of capitalism, refuse to let companies get that big. The benefits of “economies of scale” be ignored.

  • LaurenceB,

    You hit the nail right on the head, man.

    I addressed this very issue on my own blog. Government interference with the free market is the reason why Freddie Mac, Fannie Mae and a slew of other companies like AIG are “too big to fall” in the first place.

    Freddie Mac was a private corporation created to end the monopoly enjoyed by Fannie Mae. Why was Fannie Mae a monopoly? I assume that has to do with its GSE (government-sponsored enterprise) status. As I argued on my blog, non-GSE lenders do not have as much money to lend out. Mac and Mae were able to lend out more mortgages because Wall Street was more willing to invest in a GSE who at least appeared to have the financial backing of the federal government (who rakes in trillions of dollars in tax revenue every year) should Mac or Mae take on so much debt they cannot function.

    Monopolies are unnatural and are the antithesis of, if not a complete perversion of capitalism. Capitalism survives on competition between corporations and choice among consumers. Monopolies do not allow competition (or at least substantial competition) and give consumers no other choice.

    The reason these businesses are so gigantic in the first place is because they have some huge legal (and unfair) advantage over their competitors that allows them to have far more business than any other company. The same rings true for AIG, as the insurance industry (not the entire industry, just a handful who wish to have an unfair advantage over the rest of their competition) has lobbyists in Capitol Hill. Do you know that the insurance industry threw parties at both parties’ conventions this year?

    Thanks for the link to the Steve Sailer blog, HP. I read it regularly and find his insights, especially this one, to be dead-on accurate.

  • Hey HP,

    Just came across this hillarious yet true article in Time. Apparently we’re not evolving into Cuba or Venezuela. We’re turning into the French. According to this article, we’re actually more French than the French!


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