Theory on economy?

Discussion in 'The Watercooler' started by klmno, Nov 14, 2009.

  1. klmno

    klmno Active Member

    What do you think caused this mess anyway?

    I did think for a while that it was lenders letting people get in over their head, but in my case, I was fine with my debt/income ratio until I was no longer employed for a long period of time. I realize that several things played into me being unemployed but the place I worked still had a decrease in income or they wouldn't have replaced me with two temp, part-time people so they wouldn't have to pay benefits like they paid me while on salary. Also, these people were hired because they had been working some place else that could no longer keep all their employees. And there have been no openings around here in my field with mid-level experience all year. So, I tend to think the problem is lack of employment availability.

    But what caused this "freeze" in business in the first place? I don't see how it could be just banks lending too much money because it has destroyed large business as well as private individuals and small businesses. Was it just the people at the top (whether government or private business) pocketing too much money instead of putting back to the business and employees?
  2. everywoman

    everywoman Active Member

    My theory about how this country got ourselves in this mess goes beyond that. We live in a country where EVERYONE wants to make the best possible salary and buy everything for the lowest price possible. We've lost large segments of manufacturing jobs because of that. It doesn't balance out. I do my best to buy American and support local businesses even if it means paying a little more for what I purchase. It allows my friends and neighbors to stay in business. I live in a town that has gone from 5 grocery store chains to two since a large big box store came to town 20 years ago. I've watched a large # of local restaurants and mom and pop businesses go under. One of the biggest employers in my town just closed because it's Union would not allow employees to take a $2 an hour pay cut---most of them made over $25 an they do not have jobs at all. We no longer have a car dealership in town...they have all left or gone out of business. We used to have 6. But we do have 6 or 7 check cashing and title loan businesses that prey on those people with low incomes from the low paying jobs we have left so they can go buy more cheap stuff from the big box store!
  3. flutterby

    flutterby Fly away!

    There are a lot of factors.

    We had a housing boom and the bubble burst. Property values were skyrocketing and then the bottom fell out. Banks were eagerly writing subprime (can't think of my words and not sure that is the right word) loans - loans to people with marginal credit, to people without verifiable income, and loaning more to people than they could afford to pay. They made a lot of money on those loans, but didn't look beyond their nose. A large percentage of those loans defaulted and banks were taking a huge hit and losing money hand over fist.

    That created the credit freeze. Businesses that depend on loans from bank for cashflow couldn't get loans and couldn't make payroll.

    It's a lot of factors and it just trickles down. People lose jobs, or take a decrease in hours or pay and all of a sudden those loans that they were stretched too tight for anyway can no longer be paid. Housing values fell dramatically and people couldn't sell their houses for what they owed on the mortgage. Even if you could, there weren't as many buyers. The more foreclosures around you, the more your property value falls.

    It's a large domino effect, but most economists blame the banks, deregulation, as well as consumers for wanting more and more and more and getting in over their heads.

    Our national deficit plays into this as well, but don't ask me to explain it.

    I know a lot of people in my old neighborhood were "house poor"; meaning they were at the top limit for their mortgage and it only takes one snafu to knock them down.
  4. klmno

    klmno Active Member

    Interesting. You did remind me that I am sure out-sourcing plays a role in this- which would be businesses (at least in my profession) hiring overseas people to do cheaper labor. I remember a few years ago thinking about this- I was in the mid-level area of the "ladder" in my field but had always "known" that if worse came to worse at some point, I could work for people doing "lower level" work in my field, which would still be better than min wage and tie me over until I found something available for someone with more experience. Then, companies started hiring companies from India, where they had never even met a single person from the company, to do this sort of work. It left us Americans SOL, the quality of work went down, the businesses lost work. It's not the only cause of our problems, but it sure hasn't helped. I think that's what you were mentioning, too, EW.

    Really, any economic system has good points until taken to extreme- I think ours was taken to extreme and I'm concerned about how on eaarth we can ever get it turned around again. I think a lot of Americans (myself included) would be willing to sacrafice mjore and work or do whatever it takes to get the economy back on a good track, but no one knows what to do at this point.

    I had always hoped to work for myself someday but wanted to wait until difficult child was grown due to the financial risk. Being that he's incarcerated and I was unemployed, this year would have been a great time to start that. But, the companies I would need to work for are already struggling to keep there in-house employees busy and there are a tono of people in my shoes trying to "contract" whatever work they can- and not getting any.
  5. witzend

    witzend Well-Known Member

    It was deregulation of banks and investment houses. For example, it used to be that a bank could not invest the money that you had in savings. That changed. It used to be that insurance couldn't use bank loans. That changed. It used to be that banks could lend out $12 for every $1 they held. (I know this may seem wrong, but when you figure in interest, and that MOST borrowers will repay, it worked.) They changed it to $34 for every dollar, spread it too thin and lent to people who couldn't afford to pay the loans back. Then it didn't matter that they were charging people 30% interest because you can't get blood from a stone. It looked good on the books but nothing from nothing leaves nothing.

    They let the fox watch the henhouse. They haven't fixed it yet. Having the first TARP go to the banks without oversight was a big big problem.
  6. klmno

    klmno Active Member

    That applies to a lot of things in my county, too- which contributed to difficult child's legal trouble turning into a major family catastrophe for me, in my humble opinion.

    Back to the economy- I personally think that whomever decided to put the word out that the recession is over did so just to try to get Americans to start "acting" like it was over to get the economy working again- but anyone who's still unemployed doesn't think it's over. People are still losing jobs and unemployment is getting worse, not better.
    Last edited: Nov 14, 2009
  7. tiredmommy

    tiredmommy Site Moderator

    In additions to what Heather said... our large established banks would originate the subprime loans and bundle them to sell to mortgage maintenance companies. Investors would invest in this secondary market setting the price of the bundle depending on the risk of default. So you have bundle 1 (for instance) that has a low risk of default and bundle 2 that has a high risk of default. Group 1 was, in theory, less profitable because those mortgage holders qualified for lower interest rates. Group 2, however, paid much higher interest rates and were considered desirable because of their high rate of return. It was speculation; betting that these people on the bubble wouldn't default. The speculators lost it big time when the housing market crashed and many people were stuck in homes that were worth significantly less than what they owed.

    I personally think a lot of the problem can be traced back to the loosening of banking regulations in the early to mid nineties. This allowed people to buy more home than they could afford. Banks had no real incentive to properly qualify buyers because they'd be selling the loan within a few months. And, I've also read, that assessors would sometimes up the valuation of homes in an area to drive housing prices. They were influenced by unscrupulous members of the lending trade and realty associations. Everything was fine as long as the housing bubble continued to grow, it fell apart when the bubble burst.

    husband and I purchased our home at the start of the bubble in our area. We were fortunate to have a realtor that had known husband since he was a child. She showed us how much we were qualified to buy and then promptly tore the paper to shreds. She told us a much more realistic number, reminding us that there would be other bills to pay as well. She also made a point to show us homes we could comfortably afford.
  8. donna723

    donna723 Well-Known Member

    I won't even pretend to understand economics, but I think a lot of it boils down to just plain old GREED! Greed on the part of consumers and greed on the part of the big corporations. People have been living way beyond their means on credit for years! They never learned the difference between things they "need" and things they "want"! People had to have the biggest, fanciest house, the biggest gas-guzzling car, the TV with the football field sized screen, whether they could afford them or not. And young people just starting out felt entitled to have all those things right away that their parents had worked a lifetime to acquire, and there was always enough unscrupulous lenders around who were more than happy to accomodate them. Then, they started telling people that they could "make their money work for them" (and buy even MORE "stuff"!) by tapping the equity in their house! And a lot of people did it, because they assumed that the value of their house would continue to go up. Salaries got higher and higher and housing prices escalated to ridiculous levels in some areas. It was inevitible that it would all blow up, and when it did, a lot of people got hurt.

    I know nothing about economics and I'm just as puzzled by it as anybody else is. I just know what happened in my own little rural county. Even though it was very short sighted on the part of our local elected officials, two-third of the entire town worked in one big factory that made parts for Ford Motor Co. and for years everything was fine. And as everyone knows, Ford was praised as being the one major auto manufacturer that DID NOT need the bailouts. And now our factory is closed down, hundreds of good people are out of work, and we have one of the highest unemployment rates in the whole country - because they sent all those well-paying jobs to Mexico which kept their costs down! Someone somewhere may know all the answers, but it certainly isn't me!
  9. muttmeister

    muttmeister Well-Known Member

    I agree with donna; the main factor was GREED, by everybody from the top down.

    The government went along by deregulating the big guys so they were able to @#$% the little guys.

    They offered credit to people they knew would not be able to pay in the long run but were satisfied to get as much of the blood out of the turnip for as long as they could. They convinced the powers that be that, somehow, charging somebody 30% interest was ethical and should be legal. Remember in Shakespeare when everybody was appalled that Shylock was charging 10% because it was usurious?

    We sold houses to people who could not afford them. In the old days there were whole sections of houses built for working people at prices they could afford. Then everybody decided they had to have a mansion to impress people they didn't even know so they quit building houses that people could really afford and sold monstrosities to people who could barely make the minimum payments with loan schemes so complicated that buyers never understood what they were getting into.

    Businesses weren't satisfied making a little profit so they farmed jobs out to developing countries for pennies; they made a profit for awhile but people in this country lost their jobs so how were they supposed to spend the big bucks to buy the companies' products?

    For awhile, the government was catering to the rich and they were allowed to pay less taxes while the rest of us had to pay more. That means we had less money to spend on goods and services. Warren Buffet lives in my state. I remember when he said that he thought it was a crime that he was allowed to pay less taxes than his secretary. But the government thought it was great.

    On top of all of that, we have disruptions caused by weather, terrorists, crop failures, and just general angst.

    Plus - there will ALWAYS be ups and downs in the economy. I remember when things were good during the Clinton boom and some jack-donkey on TV who was supposed to be an expert said that things were so good that we should not expect the usual ups and downs to happen. We were beyond that. Yeah, right.

    Greed by the big manufacturers, greed by insurance companies, greed by goverment, greed by rich people, and greed by all of the rest of us. We are not willing to live within our means. We HAVE to have that new pair of shoes, that more expensive cut of meat, that new dress, that new sofa, that fancy house, etc., etc., etc. We were on a greedy binge and now we are paying the price. I just hope that it gets spread around evenly and the little guy doesn't get stuck with the whole bill like we usually do.
  10. DammitJanet

    DammitJanet Well-Known Member Staff Member

    Economics is something that I am really interested in but it would be a very long post to get into the reasons we are in this mess. Everyone has given very good ideas.

    One thing I have never understood is getting into too much debt. I think that is because of the way my parents did things which is because of how they were raised in the coming out of the Great Depression. They just didnt believe in buying on time. I hear of house payments over a thousand dollars and I choke! I cant imagine it. Now realize we are blue collar and make under 30k so a thousand a month is a lot of money to us. I realize it isnt to some folks but even if we made more, I still would think it was a lot.

    When Jamie decided to buy his house some Realtor told him how much he was eligible for on a loan. I about died. They told him he could get 200K on his 50K a year job. I told him he was crazy if he did that. Absolutely out of his ever lovin mind. That is the stinkin thinkin that got everyone into this mess. He found a place for 125K with a much more affordable payment. It is much higher than what I am comfortable with but he is living the american debt. Me? I only have 2 years left on a car payment and own my own trashy mobile home. But its all mine! When everyone else loses their places because they cant pay the mortgage...they can come live
  11. klmno

    klmno Active Member

    I whole-heartedly agree with that. I even made issue about this in court- because I think that our society has forced parents to use "wants" ONLY as ways to discipline their kids, or else they are neglecting or abusing their children. Then, the kid doesn't mind, takes it for granted that the needs will be taken care of, and grows up thinking that any money earned should go to toys. That's my theory on what went wrong in our society regarding child-rearing.

    Now as far as debt- one could draw similar conclusions regarding my present high debt. But, maybe it did have more to do with the housing value "boom". We lived in a little tiny house for 9 years, that I was buying. I was worried about difficult child staying in that neighborhood through middle school and high school and wanted him to go to a better school. I found out that the house was worth twice what I had paid for it 9 years earlier, so I sold it. I had no doubt that the man who bought it was pressured into it and could not afford to buy ANY house, but that was not in my control. I think he wasa taken advantage of and he was foreclosed on about a year later- that was 2 years ago.

    I, on the other hand, paid off every debt I had, put a nice down-payment on this house in order to keep my house payments in the range they were for the tiny house, and put some into savings. The amount in savings was meant to be for emergencies and to fix up this house- which needed some minor repair and cosmetic upgrades- which is how I got a good deal on it. It is 4 BR but not a big one and it is ugly, frankly.

    Anyway, I was also told I could have afforded more house but didn't want to max out what they told me because I thought difficult child might need braces, I wanted to prepare for him going to college, etc. But, difficult child kept getting into trouble. So here I ended up going through everything I had in savings for attny fees for him, restitution, a custody battle (more attny fees), then losing my benefits from work by having to go to court and appts so much that I could no longer work full time. So, I had to pay almost $1000/month for medication insurance to keep difficult child in a psychiatrist and therapist. The other county agencies would not help me due to difficult child being on probation, difficult child got into trouble again, I took a leave of absence due to court dates and him being in psychiatric hospital out of town, then I try to go back to work and find I'd been replaced. So, I didn't even qualify for unemployment. So, over the past year I have now gotten into debt again and still cannot find a job.

    Forgive me for rehashing but I didn't want anyone thinking that I got into this shape because I was out buying toys. I could have pulled things together at any point this year if I could have found a job in my field that paid comparable to what I've earned at 2 different places for the past 6 years. I still could- but the work just isn't here. It's all I can do sometimes not to blame difficult child for all of this but I have to keep that in check. But I can guarantee you- when the only topic in family therapy has turned to difficult child GETTING MORE it doesn't sit well with me- especially when I can't even get appraised value for this house due to him damaging it. LOL! And of course, if I can't keep him in a home and meet his needs, they send him somewhere else where his needs can be met and I get to pay CS. Now, when does he learn not to take it all for granted? When does he learn that if he doesn't do what he is supposed to do, he loses what he needs, not just what he wants?

    Ok, that's my Occupational Therapist (OT) vent. (And this doesn't mean that I think difficult child should go hungry or left in the cold- but he needs to learn that his biggest problem shouldn't be getting more privileges, in my humble opinion.)
    Last edited: Nov 14, 2009
  12. Hound dog

    Hound dog Nana's are Beautiful

    Economy isn't really my thing.

    But I think LOTS of things factor into the economy being the way it is now.

    I'm not anti-union per say, but I am against them being so stupid as to price their employees out of jobs. That just defeats their entire purpose. I know of companies in this area that all but begged their unions to work with them so they could keep their doors open. Union had the idea in their heads that the companies pockets were endless.......and now most of the people they represented are out of work. These are major businesses.....but when the economy is going thru a flux sometimes belts need to be tightened.....and uncooperating unions who were more greedy than smart shot themselves in the foot.

    Of course I'm not saying some big businesses don't shoot themselves in their own feet as well. Seems to be an epidemic of stupidity running amuk these days.

    Deregulation of banks most certainly didn't help.

    Then you've got credit card co's handing out plastic like so much waste paper to anyone and everyone.......knowing most of their target masses won't be able to pay their bills without hurting and stressing each month.

    And you've got the people who get those cards and act like it's free money, max them out, get more, max those out, then start robbing from Peter to pay Paul so that a flux in economy or a job layoff sinks them before they know what hit them.

    And that's not even skimming the surface.

    The real problem though is that as a society as a whole.......we've become extremely spoiled. No, not everyone. But enough. People want what they want and they want it yesterday......whether they can afford it or not.

    Bottom line. Greed.
  13. timer lady

    timer lady Queen of Hearts

    I believe the economy started to decline when companies stopped pension plans & started pushing 401(k)s. Our entire retirement is based on the stock market.

    Retiree's want a dividend to live on. Bring on the easy credit; before that when you had to earn a credit rating the market wasn't unstable but wasn't soaring either. The housing market was in a depression, i.e. no homes were being built or sold.

    Add into that the status of owning a home you cannot afford. You have to adjust your potential mortgage payment on one income not two, though the bank takes both incomes plus Occupational Therapist (OT) which doesn't always happen.

    AND the idea of need versus want. Then there are the electronic items that become throw aways - so if you bought on credit you may throw that item out before it's paid for.

    I think the worst part of our ecomony though, is that people have used their homes as credit cards. Using the equity for everything from college education (big no no) to vacations or paying off cars. The bank owns your home very quickly on that mindset.

    Just MHO on the matter. I could go on but it incenses me.