In the Wake of the Bubble

October 26, 2011

Plenty of consumers around the world seem content to ignore a prevalent fact: though the financial collapse of 2008 is over, the fallout has not concluded.  Even now, the largest players in the financial crisis continue to negotiate as the world's most notable economists, politicians and businessmen and women seek new solutions.  Yet their strategies and public pronouncements ignore the lessons of Pollock's Law of Finance: loans that cannot be paid will not be paid.  Through this lens, it becomes clear that current negotiations do not revolve around eliminating the baggage of the financial crisis, but rather passing off its burden to other actors.  The losers in this situation, as is so often the case, are the taxpayers, says Alex J. Pollock, a resident fellow at the American Enterprise Institute.

Depositors in highly liquid holdings such as savings accounts and certificates of deposit, though ostensibly protected by the financial system, are actually among its current victims.

  • Depositors benefit from an unmatched degree of security through federal deposit insurance, which offers a government-backed guarantee their savings.
  • However, despite this notable benefit, depositors are among the greatest losers in the realm of public policy.
  • The Federal Reserve Bank has pegged interest rates at near-zero levels in order to stimulate investment and encourage business expansion.
  • However, this only allows businesses to prosper at the expense of consumers (particularly the retired), who are not receiving the rate of return on their savings that they expected.

In a similar way, borrowers of fixed-rate, 30-year mortgages are also being made losers by current public policy.  Though fixed-rate mortgages have been touted as a financing breakthrough that protects consumers from upward inflationary pressures, this view is myopic.  In truth, the net benefit changes based on the economic climate.  And in the current economic climate, fixed-rate mortgages have locked borrowers into rates that are no longer dictated by the market and payment levels that are leaving them underwater.

The final loser of the economic crisis, though not made so by public policy, are economists and national planners.  Though their knowledge of and power to manipulate the national economy has often been claimed, their ineptitude in alleviating the effects of the current crisis suggests otherwise.

Source: Alex J. Pollock, "In the Wake of the Bubble," American Enterprise Institute, October 2011.

For text:

http://www.aei.org/docLib/10-11-MB-Pollock.pdf

 

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