Maybe We Should Question Business Practices and Not The Economy

We could be a little more relaxed about the general economy as the numbers show that although we could be facing a slowdown, a recession could be avoided. Corporate earnings excluding the financial sector still shows solid growth. The labor markets seems fine as well. The situation at the "general" level is not as dire as some make it seem.

What we should question is not the health of the economy but the health of business practices. The whole subprime crisis stems from creditors facilitating high risk loans to unqualified consumers. With the housing market so strong, greedy lenders just kept taking more risks. There was no shortage of investors that would buy bonds backed by these risky mortgages. It really is amazing that risk was not better assessed. But I would say part of the reason is greed. Investors are constantly trying to look for higher and higher yields. Beating the S&P average is clearly not enough. Speculators do a great deal of good to the economy by providing capital but sometimes things get out of hand and there is just too much risk out there. Risky hedge funds, alternative investments, and emerging countries all compete for capital but it seems to me that people easily forget to study their fundamentals.

Why should the individual consumer suffer at the hands of the big institutions? Thankfully, consumers are showing resilience and the reason is basically that the general economy is too big and powerful to fall immediately from problems in one sector. We must be careful with the domino affects. Down the line consumers could still suffer as more and more people are getting their houses foreclosed, which leads to lower consumer confidence, lower consumer spending, etc.

Hopefully the big financial institutions find solutions and not just try to hide their losses. UBS downgraded Fortis for lack of transparency in showing their exposure to the US mortgage market. Today the SEC started investigating Merrill Lynch for perhaps delaying acknowledgement of subprime losses. (see WSJ article). Is this all just an extension of corporate scandals to the likes of Enron?

This does not seem to be a problem with the economy, just a consequence of bad business practices. There will likely be a continued housing correction but hopefully it won't extend too much beyond that.