The short answer is that the mortgage packagers lied to the buyers. The folks who created the bonds mixed good loans with bad loans and then lied about it.
It's a rookie mistake: NEVER lie to money.
Now the money - bond buyers - is frightened. They will likely stay frightened for some time.
They'll stay away longer if there is no bailout. They will come back eventually, but they will be very leery of new bonds.
The solution is to provide very detailed disclosure and expect mistrust. After all, when you lie to a nervous buyer, it takes a long time to rebuild trust.
It'll happen, so have patience.
Why did they lie to money?: because no one told them they could not. There was no regulation - no cop on the beat - , so they got away with it.
But what are the long term effects?
Basic long term effect is that free market capitalism with no oversight and ineffective regulation has once again proved to be a disaster.
It is predictable and avoidable. So, why do we have to re-learn that lesson again and again??
The Great Depression, the Dot.com bust, Enron, etc., etc.
We have to re-learn it simply because there is too much money to be made privately by acting greedily.
The money goes to buy loose regulations from Congress.
Congress took down the firewall between banks and investments we had built after the 1930's depression.
We took them down in the 1970's and promptly got the S&L meltdown and bailout and now the mortgage meltdown and eventual bailout.
Will we learn the lesson this time? Who knows? It's a crapshoot.
One thing is for sure.
Capitalism is dead.
The capitalism that insists on a laissez faire, laissez passer, i.e., zero regulation or government oversight, is dead because it does not produce good results for most people.
The United States founding fathers broke from England to secure both liberty and property. The current debacle has destroyed property for many of our citizens. This happened because businesses insisted on the liberty to pursue their selfish gains regardless of the cost to the country.
The world declared that communism and socialism were dead upon the demise of the Soviet Union. The declaration was made because the system failed to provide a good life for its subjects.
Free market capitalism is dead for the same reason - it has failed to provide a good life for most of its citizens. Many in the United States believe that our citizens have one of the highest standards of living in the world. This is not true by most objective measures.
Capitalism's apologists insist that letting entrepreneurs work for personal gain is good for the economy because they will build capital in the form of money for themselves and that they will use that capital to invest in new businesses. From the new businesses will come jobs and economic growth.
That idea is wrong. It is wrong because the individuals who accumulate the wealth have little or no necessary incentive to risk it on new businesses. They are just as likely to buy a yacht and an Italian villa as they are to invest in a new business.
There are people who make such investments, but allowing their ranks to grow in the hopes of creating more new businesses just does not work.
Today, the world had too much capital. Capital markets are worldwide and operate on a 24/7/365 basis thanks to the internet.
There is so much capital around that its owners have a hard time placing it in secure investments. At the same time, just about every sound business idea is able to receive funding. In addition, investors spend much of their time on financial or non-productive investments. Thus we have the derivatives that brought the financial system to the brink of collapse.
This is happening at the very time when more and more people around the world are sliding into poverty, despair and violence.
Copyright, 2008 by Mike P. McKeever, Santa Rosa, CA. This text can be posted in any electronic forum. For publication in printed form please request permission from the author: email: firstname.lastname@example.org.