I’ve never studied economics and so the following is how I understand the recent financial crisis after asking around and using google.

In the last 5 years or so property prices particularly in the US started going up; this was stimulated by clever people creating new types of financial institutes that got around government rules about financial institutes needing a certain reserve ratio (amount to be kept in cash). This happened in various countries but more so in the U.S. because there the regulations were less stringent. Since the economy was flourishing, and even though experts in the field could see where this would lead, in such a climate no government would want to insist on tighter regulations – this would be very unpopular.

So we have this bubble of buying and selling – even ordinary people, re-mortgaging their houses for that extra cash to spend on something. It makes sense. You see an opportunity and you take it.

What makes this unstable is when what is borrowed is close to what is the value of a property, because property prices always fluctuate. At some point, sooner or later, experts involved in this buying and selling are going to realise that this bubble will break and so they stop buying and selling. When they do, other experts recognize what is coming and do the same. Now the time for a property to sell takes longer and so there is less cash in movement. It hits institutions (banks / financial institutions) first because they can’t move their money to repay loans.

There was also a stock market bubble, stimulated by interest rates being low. Governments kept interest rates low because this stimulates economic rate. This is a good thing but usually inflation starts to happen (a chain reaction of wages going up, things costing more to buy and so money having less buying power) and this is a warning governments usually see in time and then solve, by raising interest rates. This time inflation was well under control (so interests rates remained low); perhaps the efficiency of new technologies and globalisation (imported cheap products) masked or compensated for the inflation that usually goes with strong growth, but this is a guess.

What is of interest is how governments have responded to this.

The U.S. response was to give credit and to buy mortgages, instead of buying bank shares. Buying mortgages involves more administration and doesn’t punish the shareholders who are mainly to blame for the problem in the financial institutions to start with. Shareholders control how financial institutions work. Where the government buys newly issued bank shares, it means that shareholders lose part of their stake (influence on how the company works and the profits). The U.S. response, -buying mortgages- means that there is no future restriction nor punishment for the irresponsible fat cats (the majority shareholders). They have no interest in being prudent since they didn’t suffer, and are likely to repeat this in the future. Government-owned shares promote more prudent actions, but, yes, in terms of politicking, this is called socialism and that’s most likely the reason that the U.S. didn’t take the approach the U.K. government took. Today on the BBC radio (October 14th) it was announced that the U.S. is considering buying shares in the nine largest banks, whether they need it or not. If this goes through now shareholders of banks who were responsible will be punished along with the irresponsible ones.

A friend posed these questions:

“What would be a “Baha’i” solution to the problem, and here I mean more than the very general ideal of the elimination of the extremes of wealth and poverty and more to the point of how is this ideal to be accomplished?

Is a form of “world socialism” the answer?

Does free market capitalism as we know it have to be fundamentally changed, and if so, will the wealthy of the world ever agree to such?

To my way of thinking the failure of Marxist ideology was more than just the misuse of its ideals by tyrants such as Stalin and Mao. It was also the fact that individuals are more concerned with their own well-being (family and close relatives etc.) than with the well-being of the people they do not know or have contact with. How much are people willing to sacrifice individually for the good of the group, especially when the group is the size of humanity?”

What do you think?