The Cause of Our Economic Situation

By: Roger Sheppard
By: Roger Sheppard

One Man's Effort to Understand How We Got Into the Mess We're In

With all the talk of stimulus packages (don't forget, the Bush Administration did a couple of these, too), lay-offs, rising unemployment and everything else, it's sometimes difficult to figure out how we got into this mess.

But I think it's useful to try to understand that in the hope that we will not repeat it.

As much as we did not learn the lesson of what helped to bring on the Depression in the 1930s (buying stocks and other things on "margin," that era's word for credit), I'm not optimistic that we will avoid a repeat of what we're going through now.

As best I can figure out, here's why we're in the mess we're in. Please keep in mind, I am NOT an economist. And while I may miss some of the nuances of the situation, this is my effort to get my brain around a complex mess. See if you agree or disagree:

Banks and other companies, in an effort to make their bottom lines look good and to keep stock prices rising and stockholders happy, made risky loans to home-buyers and everyone else who wanted credit. (Remember these stockholders are you and me if we have IRAs, mutual funds or invest in individual stocks.) Some people have a dozen credit cards and use one to help pay on the other in a financial death-spiral. We all believed that folks to whom credit was extended would (eventually) pay back what they owed (along with the mountains of interest that accrued along the way) and we'd all be happy and we'd all make money.

Home-builders believed that prices and demand for larger and larger homes would go up forever (nothing ever does), so many of them over-built, putting money at risk for homes that might never sell. At the same time, high-paying manufacturing jobs have been dwindling, meaning that the wages of the average American have pretty much been stagnant while everything else has gotten a little more expensive each year. Inflation has not been terrible, but like water through sandstone, a trickle still erodes away rock the way that inflation eats away at savings and earning power. People who were not conditioned to save in the first place, saw what little savings they had, being eaten up by inflation and the never-ending urge to buy more and more.

Companies and government encouraged people to spend more than they could in order to boost short-term profits and again, to help the price of stocks to rise. Marketing is a powerful tool. Since a large chunk of the American economy is fueled by consumer spending, if people could be convinced, cajoled or otherwise pressured into buying more and more stuff (much of it on easy-to-get credit at astronomical interest rates), the economy would boom. Companies tightened their belts and found ways to do more work or produce more product with fewer employees, thereby increasing profits. Some transferred some work overseas, where workers would do the work for less money and would require fewer benefits and companies faced fewer environmental and job-related regulations.

Government, through quasi-governmental organizations like FreddieMac and FannieMae, pressured banks to loan more and more money to people who could not afford homes, in the belief that home-ownership (or at least "mortgage participation") would help make them better, more responsible citizens and give them a stake in the American Dream. The fact that many of these loans had huge balloon payments that would become due a few years after folks moved in, or that the rate of interest would be allowed to fluctuate (in most cases rise), was a cruel trick on these people who were allowed to taste the American Dream but not enjoy the complete meal. Many of them eventually lost the homes that had been enticed and tricked into buying.

As this began to happen more and more, the lending institutions realized there would be large amounts of money they might never get back. Foreclosures increased in those areas (largely urban and suburban communities) which had seen so many of these high-risk mortgages made.

When the banks could no longer rely on their own assets or when large amounts of debt began falling behind, they went looking for other sources of money to help shore up the drain. They looked to foreign banks to help "buy up" the debt that they were owed and which they hoped (now there's a sound economic plan for you!) they would eventually recover. The foreign banks and countries, believing that America was "too big to fail," took on more of this debt, confident that the Yanks would figure out a way to get things in order before they got too bad. They were wrong.

As things got worse, the banks started (at last!) tightening up credit. Only now, they were shutting off credit to the businesses and people who were in a position to pay it back and create jobs and commerce along the way. But when you ain't got it, you can't lend it.

As companies saw their access to money dry up and news about foreclosures became more widespread, people did what people do -- they got scared. Even if foreclosures weren't happening in their communities (like they are NOT happening in the Mid-Ohio Valley), they began drawing in their spending habits. While it would normally be a good thing to spend a little less and save a little more, in a time when fear is beginning to take hold, that can be a bad thing. Many people criticized former President George Bush for telling Americans to "go shop" after Sept. 11, 2001, to help make sure the American economy stayed strong and to help make sure that the terrorist attacks on our nation and our economy, failed. While it could be argued that we might have been better off if he had called on more Americans to join the military or volunteer fire departments as a reaction to those events, I can see his point. The only problem is, when people are having less and less to spend, but are strill wanting to buy more and more things, the only way they can get them is by using more and more credit.


It's always easier to look back on things and explain (or attempt to explain) them, than it is to chart a map forward. We may have no choice but to throw vast amounts of money at this problem, hoping to use the cash like kindling to build a roaring fire from mere smoke (and mirrors). But after this situation goes away (and it will), what will we have learned from it?

Probably nothing.

But I would certainly make this recommendation. While I would not like to see companies and banks more beholden to the federal government, I think there ought to be much stricter limits on the way that credit is extended. We ought to never have a situation again where people are receiving five or ten credit card offers a week in the mail from credit card companies who don't know (and don't care) anything about those peoples' ability to handle that kind of debt. The credit card companies (which are in most cases large banks) are betting that enough people will take adavantage of the offers to more than outweigh those who do not and the bank profits will rise.

As we have seen, if you give people enough credit, they will hang themselves (and the rest of us) with it.

Again, this is my effort to understand our current economic situation. If you disagree with my assessment for "how we got where we are," I hope you'll share it here, in the hope that we will ALL understand it a little better!

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