Financial deja vu

Having come through the S&L crisis of the 80's and 90's, I find the current financial crisis to be extremely frustrating. One would have thought that we would learn from past mistakes but that doesn't seem to be the case.

The last crisis was closely correlated to oil prices -- as is this one. One of the differences is that last time interest rates were too high, this time they are too low. Last time, flexible rate loans caused borrowers to find themselves with payments beyond their ability to pay. This time, low interest rates allowed unqualified borrowers to get into homes they couldn't afford. The effect was the same. A glitch in the general economy suddenly meant that borrowers couldn't make their payments.

The biggest culprit in the mess is the government. By guaranteeing loans for borrowers with inadequate capital of their own to invest in real property, they set up a system for failure. The borrowers must share risk proportionately with lenders. When housing markets were soaring, the system worked. Housing markets always go through periodic deflation. It's part of the cyclical nature of markets. Cash-strapped borrowers defaulted. Lenders were burned.

Government interference in markets always inflates the cyclicity inherent to capitalism. If supply and demand were allowed to work, so would the market. Lenders would evaluate loans based on risk and reward. We would have fewer homeowners but we would have more savers.

We have pulled all available cash into the marketplace and created an economic bubble that must deflate. What we see today is a lot of air going out of that bubble. The big question is whether it will deflate slowly or pop suddenly. I fear that additional government interference in an effort to "salvage" the economy will only set us up for a greater fall. Let's take the hit, get the government out of the "guarantee" business and move on. It will hurt but will make our economy stronger in the long run.

One thing the government should do is to criminally prosecute Executives who receive "golden parachute" bonuses within a year of the failure of any publicly traded corporation. Those executives should be liable for double the value of any such bonuses or the liquidated value of all of their personal assets -- including homes and personal property. They should not be allowed to seek the shelter of bankruptcy. Any IRA or 401K assets should be included in the liquidation. They should have no protection whatsoever. Leave them penniless.