I am continually amazed by the almost total lack of knowledge about basic economics so apparent among most Americans. For most of our countrymen economics is as unfathomable as quantum physics and the theory of relativity. Two recent news items made me once more reflect on this sad feature of our society.
An article in USA Today, that most brainless and inane fish wrap, discussed the US Justice Department going after Standard and Poor’s fake high ratings for bonds composed of “toxic” subprime mortgages. The article, and apparently the Justic Dept, display criminal ignorance of the subject. It was not Standard and Poor’s high valuations of these bonds that led to the “Financial Meltdown of 2008,” rather it was its downgrading of these bonds to “junk” status that caused the meltdown.
Once more, subprime mortgages were not given to people too poor to buy the house on which the mortgage was based. Subprime mortgages were used by investors to buy homes. The reason, prime mortgages are only given to those who will live in the home. All of my European buyers of property in Florida used subprime mortgages siince they did not even live in the country, much less in the home bought. They also used “no-doc” loans since, believe it or not, there are no credit scores given outside the USA. That’s right, there are no Experian or similar ratings for borrowers outside the USA. And I can assure you that my European buyers were not poor. Ditto investors in the USA.
Subprime mortgages per se did not cause the “meltdown.” Rather it was the faulty algorithms used by 30 year “wiz-kids” at Standard and Poor’s and other rating agencies to downgrade, not hype, mortgage based bonds that caused the financial panic. So going after Standard and Poor’s for falsely overvaluing these bonds misses the point all together. Of course, however, we all know that the real reason the Justice Dept is doing this is to get back at the rating agency for downgrading US Treasury bonds, the most vapid exercise ever conducted by Standard and Poor’s.
The other news item that revealed the average American’s deplorable lack of understanding of basic economics concerned some people commenting that the Russians are “wasting” tons of money on the Winter Olympics in Sotchi, a resort town on the Black Sea. They argued that the Russians would do better by spending the money on raising the living standards of the “poor.”
What nonsense, the best thing you can give to a poor man is a job so that he can solve his own problem. The money Russia is spending to prepare Sotchi for the Olympics is employing thousands in this backwater used to poverty. The objective is to make Sotchi a world class resort that will employ many more thousands in a thriving tourist industry. As far as I am concerned, the Russians are showing the best way to use public funds to generate economic progress.
But I fear the average American will continue to have as much understanding of basic economics as of quantum physics, i.e. zilch, nada, niente, a great big goose egg.