A rough economic road ahead

Ever since the 1930s, the federal government has involved itself in housing policy. It has developed many programs to encourage both homebuilding and homeownership. Because of this, some blame today's crisis on laws passed by Congress like the Community Reinvestment Act of 1977, which prohibited banks from targeting only wealthier neighborhoods with their services. Since then, there have been several revisions to the Act. It was first intended to ensure that under-served populations can obtain credit, including home ownership opportunities and commercial loans to small businesses. But ultimately, this forced banks to lend to those who were deemed bad credit risks.

Interest rates became substantially low, so it was much cheaper to borrow money. Longer-term and more capital-intensive projects suddenly became profitable. With a large supply of money, the real estate market started to overbuild, regardless of a low demand from consumers. Builders, seeking to recoup, lowered prices dramatically.

Other analysts say that the government should have taken steps to regulate the financial markets and their use of derivatives-contracts that promised to protect investors from losses (sort of like insurance, but much riskier). Throughout the 1990s, some argued that derivatives had become so vast and intertwined that they required federal oversight to protect the financial system. Alan Greenspan, a supporter of derivatives said that the problem is not that the contracts failed, but rather, the companies using them simply "got greedy".

A relatively obscure business practice just two decades ago, the derivatives market is over $500 trillion, up from about $100 trillion in 2002. Theoretically intended to limit risk and ward off financial problems, the contracts instead have spread uncertainty about how companies value them. For now, only time will tell if the government "rescue package" will help stabalize our economy. In the meantime, better stock up on soup.

Sources: Special CNN report by Ron Paul; New York Times: Thursday, October 9, 2008