What was the cause for this economic crisis?

As of this writing, the Obama administration has been in office for about four months now.   In the first few days in office, he proposed some very bold and far reaching spending plans to provide economic recovery, as well as social engineering.  These were heavily debated by liberal and conservatives on the radio and TV talk shows.  Rarely did any of these discussions have anything other than partisan political bickering.  The bickering and fighting was nothing more than the political blame game. Plus, it shows that pundits and politicians have a very limited knowledge of the way our economy works or how to run a business. 

So, what was the cause of the crisis?  I believe a major cause is uncertainty.   The 2008 presidential election was the longest and most bitterly contested in recent memory.  Potential candidates started campaigning as soon as the 2004 election was over.   The front runners changed constantly, issues would flare up and go away, candidates would drop-out and lend their support to unexpected candidates.  

The policies of the Bush administration were understood. Entrepreneurs and investors had a fairly good idea of the regulations and taxation policies, so they could go about taking risks, planning investments, and building our economy.     However, early 2008, it was becoming clear that next administration was going to be completely different from the Bush administration but how would those differences be played out.  This uncertainty changes the way business people make decisions because balancing the risks and rewards becomes much harder.

The investors began moving money around, buying and selling assets.  Many investors quit buying the riskier investments like mortgage back derivatives and debt swap instruments.  This caused a different problem for the holders of these assets. Their balance sheets (assets vs liabilities) for these companies depend on the value of the bonds and that market value determines the value of the bonds (mark to market rule).  So, when investor quit buying the bonds, they became worthless pieces of paper.  This caused bigger problems for many financial institutions that had these bonds listed as assets in their companies.  

This situation is not very different than end of the Clinton administration.  It was clear that there was going to be an administration change.  Clinton had been in office for two terms, there was going to be a new administration.  Polling had the race pretty much a dead heat between Al Gore and George Bush.  The tech sector was suffering from the dot com flame out and many investors were nervous.   This set of events triggered a recession that started a few months before Clinton left office.  So, Bush inherited a recession it did not last long, a few months.  It ended when Bush’s economic and tax policies became understood by the business community.  

A free market economy is full of cyclic events.  It is just part of the roller coast ride we call life.   Personally, I lost a job and/or suffered with each recession since Jimmy Carter.  It is just the way things work. There are cycles in everything and if you are smart you use the good times to build a plan so that you can ride out the tough times.