Common cents
The Panic of 2008 is really pretty simple.
American families, businesses and government have lived beyond their means for years. Now it’s time to pay up.
People bought homes they couldn’t afford. Their lenders often didn’t care because they weren’t on the hook for repayment, having already made their money by selling those mortgages to third parties. That's the foreclosure crisis in a nutshell.
Companies cut deals they could not afford, failed to invest adequately in modernization quickly enough because they were trying to maximize short-term profits to satisfy Wall Street, and outsourced labor to stem financial bleeding and maintain higher short-term profit margins. Hence, the collapse of the automobile, steel and even the newspaper industries.
The federal government faces massive deficits because the Bush administration paid for wars we could not afford.
We see similar choices in the lives of people around us every day:
- A couple that lost their jobs job but pay for cable and Internet;
- A penniless college student sporting an IPod;
- A person who lives in poverty but has a top line entertainment center;
- A family that goes on vacation every year but racks up thousands in credit card debt.
Sound familiar?
Some have come to believe the American Dream is about having stuff, but it's not. It’s about opportunity. When you get that opportunity, however, you have to use it wisely.
The bottom line is the current financial crisis is a necessary market correction. Painful, but necessary.
The problem is that those of us who actually spend responsibly may experience the backlash, now that many of these companies have to cut back after years of sacrificing long-term sustainability for short-term profits.
Ford and GM? Sorry, you had it coming. You should have invested in more fuel-efficient vehicles years ago, and you and your unions shouldn’t have negotiated deals no one could sustain. Now we can’t afford to drive your cars because imported gas costs too much. I can’t wait to get my Prius.
Newspapers? You had it coming too. While you were sucking down 21 percent profit margins as recently as 2001, you failed to transition under new readership trends. Most newspaper web sites are still poor shadows of what they should be, and no one’s making as much money off the Internet as they might be if they’d adapted to the new market 10 years ago -- when it was still new.
AIG and Lehmann Brothers? Don’t get me started.
We have a near-Panic of 2008 largely because Wall Street overreacts to everything, good or bad. They fueled the dot-com boom and bust – Pets.com? Are you kidding me? – by overreacting to that shiny new thing called the Internet, much like they’re overreacting to the market problems today.
The reality is that growth cannot be constant, and retraction is necessary when something goes too far. People are spending less, and that’s a good thing. There’s a word for this. It’s called “responsibility.” This is an overdue market correction that, if acted upon wisely, could right an economic ship that has been slowly sinking for years.
Financial sustainability is really pretty simple:
Live within your means, and produce something of value.
(Good reading for today: This poignant story. Make sure to read it to the end.)
American families, businesses and government have lived beyond their means for years. Now it’s time to pay up.
People bought homes they couldn’t afford. Their lenders often didn’t care because they weren’t on the hook for repayment, having already made their money by selling those mortgages to third parties. That's the foreclosure crisis in a nutshell.
Companies cut deals they could not afford, failed to invest adequately in modernization quickly enough because they were trying to maximize short-term profits to satisfy Wall Street, and outsourced labor to stem financial bleeding and maintain higher short-term profit margins. Hence, the collapse of the automobile, steel and even the newspaper industries.
The federal government faces massive deficits because the Bush administration paid for wars we could not afford.
We see similar choices in the lives of people around us every day:
- A couple that lost their jobs job but pay for cable and Internet;
- A penniless college student sporting an IPod;
- A person who lives in poverty but has a top line entertainment center;
- A family that goes on vacation every year but racks up thousands in credit card debt.
Sound familiar?
Some have come to believe the American Dream is about having stuff, but it's not. It’s about opportunity. When you get that opportunity, however, you have to use it wisely.
The bottom line is the current financial crisis is a necessary market correction. Painful, but necessary.
The problem is that those of us who actually spend responsibly may experience the backlash, now that many of these companies have to cut back after years of sacrificing long-term sustainability for short-term profits.
Ford and GM? Sorry, you had it coming. You should have invested in more fuel-efficient vehicles years ago, and you and your unions shouldn’t have negotiated deals no one could sustain. Now we can’t afford to drive your cars because imported gas costs too much. I can’t wait to get my Prius.
Newspapers? You had it coming too. While you were sucking down 21 percent profit margins as recently as 2001, you failed to transition under new readership trends. Most newspaper web sites are still poor shadows of what they should be, and no one’s making as much money off the Internet as they might be if they’d adapted to the new market 10 years ago -- when it was still new.
AIG and Lehmann Brothers? Don’t get me started.
We have a near-Panic of 2008 largely because Wall Street overreacts to everything, good or bad. They fueled the dot-com boom and bust – Pets.com? Are you kidding me? – by overreacting to that shiny new thing called the Internet, much like they’re overreacting to the market problems today.
The reality is that growth cannot be constant, and retraction is necessary when something goes too far. People are spending less, and that’s a good thing. There’s a word for this. It’s called “responsibility.” This is an overdue market correction that, if acted upon wisely, could right an economic ship that has been slowly sinking for years.
Financial sustainability is really pretty simple:
Live within your means, and produce something of value.
(Good reading for today: This poignant story. Make sure to read it to the end.)
posted by The Honest One at 12:11 PM
3 Comments:
Speaking from a Banking point of view I do have to agree. It was took fast too easy, with no one giving the speech about responsibility. I'm calling a USA "Time out" all those with bad credit go sit in the corner.
I'm no expert, so if I am mistaken in my understanding of inflation or other stuff just mention it and I will adjust my opinion.
Individuals were not necessarily living beyond their means, rather the government was living beyond its means. Since the government needed more money for their endeavours (entitlements and military conflicts) the Fed artifically increased the money supply.
The Fed also brought down interest rates to adjust to the tech bubble burst.
All this, plus other micro-managing of the market, by government allowed individuals to afford what they could not afford and banks to loan to people who probably would not normally get the loan amount.
In normal economic times increase in money supply usally is greeted with higher interest rates, because more money devalues the dollar thus to get equal value in return more money will need to be payed to the lender. (I think I got this right.)
The Fed artifical inflation of the money supply and lower interest corrections affected industries differently. Computers are rather low in price, and real estate is rather high in price. Is the house really worth the price? Apparently not, people are forclosing because the house is worth less than the mortage.
The sub-prime lending is merely a symptom of the crisis and not the actual cause. The failure of the risky security market is a symptom of the crisis not the cause. A penniless college student with an i-Pod is a symptom of the crisis not the cause.
Yes, people should had been more resposible and see that 75 year old row home is not worth $179,000,that would involve thinking, which would involve getting a good education, which brings us to government's involvement in education, another "big government" mess.
I find it hard to blame the Big Three solely for the state of production when it comes to selling (or not selling) more fuel efficient hybrids, and I find it laughable at best to act as if they're a reactionary force always pushing back against an empowered public demanding positive innovation.
Honestly, both the public and the US government play their own crucial roles in the tangled mess that is the automobile market.
It doesn't make the Big Three innocent. But if they're going to be lined up against the wall for their sins, at the very least, they shouldn't be standing up there all alone...
http://news.yahoo.com/s/thenation/20081127/cm_thenation/769386733
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