Now What?
The global economy has been sinking into a quagmire allegedly created by the magnitude of crappy mortgages that turned into foreclosures in the seminal year of 2008. Everything seemed to be going along reasonably well until something happened. People went to work and earned their paychecks. Mothers shopped for groceries and toted the children from one after school activity to another. Consumers bought new cars, flatscreen TVs, cell-phones and iPods. Cable and satellite content delivery utilities put every conceivable sports event on screens in millions of American homes. Beer and a multitude of fried potato and corn products ran aplenty. Tens of millions of Americans earned a paycheck, received a pension payment, got a public assistance check of one kind or another, and dutifully spent all of it on the consumables, commodities and utilities and medical bills. All seemed right with the world.
But lurking just beneath the surface was a condition so insidious that it would bring down the global economy in a way that the most diabolical arch-villain criminal mind could not even imagine. On top of that, it was not especially dastardly in its character. One could not point to the evil doers and single them out for punishment.
The decline of the global economy was not a single event nor was it caused by a single cause. We need a single day to represent the transition from The Before and The After. This date will be September 13, 2008, the day that Lehman Brothers filed for bankruptcy. On the morning after the protracted crash there was exactly the same number of people willing and able to work like they did the day before. They all had the same amount of income to spend for all their necessities and discretionary purchases. So what happened?
A couple of things happened that culminated in what professional Economists call a Meltdown. The biggest trigger was the resetting of variable interest rates on millions of mortgages that people had taken out on their homes, to buy homes and vacation spots, and refinance existing debts. Suddenly there was the equivalent of a huge tax that upset millions of household budgets. House prices started to fall making it difficult or impossible for people who needed to sell for one reason or another to realize the anticipated equity for their future goals. Some of them wanted to move to a smaller place, a retirement village, an assisted living location, etc. For them the selling price of the house was their retirement investment.
Other people who were fully entrenched in mortgage debt found themselves in the upside-down position where the payoff balance of the mortgage was higher than the new lower market price. For them to liquidate their home investment, it would cost them additional money just to get out. As other dire economic circumstances, such as the loss of a job or the resetting of an ARM, their ability to maintain timely payments diminished.
If everyone is ready to work and make things, provide services, and such, why is the economy still collapsing? The banking system of the world has two essential functions: move people's money around as payment for goods and services and to make loans for operating capital and to allow present growth through equipment and facilities acquisition. The present failing of the system is that the banks are not making those loans. Even more importantly, consumers are finding it difficult to borrow the money to buy all the stuff that the economy needs them to buy.
Right now, millions of consumers are waiting to see if they have a job next month or next week before committing themselves to spending more money that they have not yet earned. At the same time the lenders are wary of putting out the funds for consumers to use because they do not want to increase their loss exposure when the credit card payments fall behind and many customers will choose bankruptcy to settle their accounts. There is a bottom line fact at play in all of this. That fact is that all the income (earned or otherwise received) of all the employees in America does not add up to enough money to buy all the stuff that the manufacturers and service providers need to buy in order to keep the economy vibrant.
Consumers are not making discretionary purchases because they are using their remaining incomes to pay for necessities and they are a bit wiser about using credit to finance their lifestyles. Real buying power of the aggregate population of the US declined over the years as the total outstanding credit levels increased. While the US population grew by a few more millions, hundreds of thousands of well paying jobs evaporated as the manufacturing sector relocated to more conducive lands with hungry workers who could live on a lower pay level. Some of those jobs were replaced with the low wage variety where immigrant labor, unskilled citizens and those who are new to the labor market could earn enough to be considered employed but not so much as to be able to pay for everything that is necessary for quality life in the United States. Hence some in some families two wage earners holding three distinct jobs were necessary to supplement their TANF, Food Stamps and WIC payments to make ends meet.
These families were not typically the ones who were mortgaging their dwellings for a few more dollars now in anticipation of future earnings.
Part of the dynamics of the free market economy is that some people do not have to provide their labor for their incomes. Instead they derive a few cents on other people’s money transactions. They receive interest on the mortgages, interest on the balances carried by credit cards. They buy and sell paper that represents natural gas, coal and electricity that the families buy to heat their homes. They buy and sell paper that represents crude oil that is refined into gasoline so people can drive to work, the grocery stores, the doctor’s office and everywhere else. Every dollar that is derived from those activities was paid by someone who earned far less. While this process is a natural and necessary one, when too many people get into the same game the benign character of the game becomes malignant. At some point the consumers of the commodities suffer to keep up with and pay the costs while the providers recline in comfort.
ExxonMobil earned record profits of tens of billions in the year ending Oct 2008, those profits computed to a 15% return on the stock price of $75.00 per share. Everyone who owns any mutual fund would like to have such an annual return on his or her investments. The reality though is that many of the stockholders in ExxonMobil paid $10.00 or less for their original investments many years ago. At $10.00 per share the $2.83 quarterly dividend makes a 113% return on investment. The billions of dollars in annual profits directly relate to cold families in the winter months.
With our markets measuring its performance in shareholder profits, its efficiency in keeping production costs as low as possible, there is too much room for suffering out of sight of the board room where financial decisions are made.
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