The more one reads commentaries and opinions from some of the nation’s economists, the more one discerns a sense of confusion as they try to explain the current U.S. economic crisis – a situation brought about by the fallout in the home-mortgage market and its creeping effect on the global capitalist economy.

It is astounding that as the standard of living of millions of Americans is threatened with the escalating crisis, and the American Dream wanes, top economists appear to be lost.  But, the reason for the current economic problem seems rather clear. 

Simply put, economics is a cause and effect system led by the economic law of supply and demand. Economics 101 shows that as the demand for a product rises, so does its price. Where that demand is inelastic, like the demand for bread, then regardless of how much the price for that product rises, the demand will remain constant. However, where the demand for the product is elastic, or fluctuates easily, prices also fall, or alternately, if prices rise too high, demand will fall.

What happened with the U.S. housing market, a fact that apparently ignored by most economists, is that artificial means were created to spike the demand for houses, based on the creation of easy, unrealistic credit. One doesn’t even need a high school diploma in economics to realize that this artificial situation would not hold.  Sound economics cannot be based on the kinds of artificial incentives which resulted in millions of borrowers, who under normal circumstances could not get mortgages, receiving loans on easy, unrealistic terms. 

This resulted in an equally unreal demand for houses, pushing up their prices, and setting off a housing construction boom, especially here in South Florida. Naturally, when the real repayment rates for these, mostly adjustable, mortgages matured, reality sets in. Not surprisingly, a large percentage of these borrowers defaulted, resulting in a classic economic domino effect: foreclosures, a glut of unsold houses, falling house prices, constricting of credit; less disposable income, and job losses.

To add to this economic mess, the banking system is growing insecure with big mortgage banks, like Indymac and Countrywide, in serious trouble. Earlier this year, the government, through the Fed Reserve, stepped in to save another big bank, Bear Stearns, because it was rapidly losing liquidity. Just last weekend, the government made moves to support Fannie-Mae and Freddy Mac, the two biggest guarantors of mortgage loans.

Not only has the artificially created demand for houses opened up credit windows nationally, but it provided an opening for banks and investors on the global market to invest in this sub-prime loan market. Reports tell the story of global banks and brokerages having had to write down some $300 billion in failed mortgage investments.

It is extremely difficult to understand that the bright financial and economic minds in the capitalist world failed to understand that economics is not based on artificially generated premises.  One of these economists was reported saying the housing market was so good, and driving the economy so positively, that it was assumed that borrowers of adjustable mortgages who earned low wages would have been able to secure better paying jobs to meet the increased rates. This is utter nonsense. How could unskilled, undereducated borrowers get better paying jobs, when little incentives were being given to them to improve their job skills, and employability?  

Now, everyone is depending on the Federal Reserve, Congress and the President to immediately take initiatives to correct the economy. Those turning to the government seem to have forgotten that the American economy is the bedrock of the free-enterprise system, where supply and demand reigns without much government interference. It is amazing that the main players of this free-enterprise system – financiers, bankers, investors, economists – are now depending on the government for support. But, this is hardly a poor reflection on the free-enterprise system, rather a sad reflection on the greed (and stupidity) created by the system.

Unfortunately, the government cannot be expected to continue to bail out banks, as it will be hard pressed to continue doing this after the recent big bail-outs. This means that more banks will fail. The signs are already there.  Some of the country’s biggest financial institutions like JPMorgan-Chase, Merrill Lynch & Co., and Citigroup, Inc., are expected to report second quarter losses, in addition to the combined $73 billion in losses reported since the mortgage crisis began last year. Lehman Brothers reported a 78 percent loss in their shares after peaking in February, plus losses of $3 billion for the second quarter. Financial analysts also predict that other big real estate lenders like Washington Mutual Inc, and National City Corp could face serious crisis because of the mortgage and real estate problems.

The escalating problems with the banking system will create more hardships not only for borrowers in getting mortgages, personal, auto-loans and credit cards, but for businesses to get loans to start new, or expand current businesses. All this, coupled with the rising oil prices not only makes a recession more likely, but a very long recession more possible.