So How Will The Financial Crisis Impact The Wider Economy?

from the connecting-the-dots dept

Earlier this week, we received a tremendous response to our post about the financial crisis and how it might impact the tech industry. We received multiple requests for more posts along those lines -- and American Express has decided to help foster the discussion. This post is being posted both here and at American Express' Open Forum blog. Also, more importantly, AmEx is sponsoring a Techdirt Insight Community Case to facilitate a larger conversation about how this impacts small businesses, and what they can do during this crisis. If you're a small business owner concerned about the crisis, one way to make a little extra money is to take part. Sign up here to provide your own analysis. You can also comment here (or on the AmEx site), but if you want to earn some money, you need to sign up and submit your insights as a member of the Insight Community. So, now let's kick off a discussion on how the financial crisis might impact the wider economy, with a special look at the small business market.

Getting beyond Wall Street

I discussed some of that in the original post, but many people are still having trouble seeing how this crisis spreads beyond Wall Street financial firms (or, in some cases, their own stock portfolios). There are still plenty of people screaming out that these financial firms need to be punished or done away with completely, without any recognition of how that might flow through the rest of the economy. The New York Times has an excellent writeup, noting that people said the same thing as the Great Depression was happening, as well -- again, not realizing that destruction on Wall Street can flow through the rest of the economy.

The basic problem is the fear that the credit markets will simply dry up. If no one will lend money (or it simply becomes ridiculously expensive to borrow money), then some very basic economic functions cease to work. This may start out at a high level with bank to bank loans and bank to business loans, but it can also filter down to things like your mortgage (if you thought things were bad before, wait until adjustable rate mortgages reset with even higher interest rates, contributing to this spiral), car loans and even credit card payments. At the top of the chain, banks are increasingly afraid to lend to each other fearing that whoever they lend to (even for very short term loans) may default before the money can be paid back.

Already, some companies are seeing the direct impact. For example, Caterpillar, the maker of construction equipment is a company you would think would be separate from the financial mess on Wall Street. It has great credit and a long history of being good for paying up any debt. Yet, in a matter of days, the interest that Caterpillar has to pay to borrow has shot up.

Debt isn't a bad thing

Now, there are those who will say that any "borrowing" or "debt" is somehow bad (we had a few such comments on the first post), but that shows a fundamental (and, somewhat dangerous) misunderstanding of basic economics. Borrowing money and taking on debt is not, by itself, a bad thing. In fact, it's a very, very good thing. If you can borrow money at one rate, and invest it more profitably, you can contribute to economic growth and provide important goods and services. It's at the very core of a functioning economy. Money moves around so that it can be invested in more profitable endeavors, and that benefits all of society, by making sure that the money is more efficiently put to work.

Of course, with any amount of debt, there's always a "risk" involved in whether or not the money (and interest) will get paid back. The amount of interest generally represents the cost of that risk. Higher risk requires more interest. Thus, there are a variety of different ways that you can invest your money with different risk/reward profiles. Lower risk gets a lower return and higher risk, with its higher chance of default, should net you a larger return in the long haul.

However, the fear of various banks defaulting at the top of the pyramid is increasing the risk down the entire chain, even to the point that relatively "safe" investments are suddenly being seen as risky. Part of that is due to uncertainty about how the crisis will impact others (sort of a self-fulfilling fear) and part of it is due to a still murky understanding of the risk involved in the assets at the heart of all of this mess: the various mortgage backed securities you keep hearing about.

So what happens if things get worse?

Well, it won't be pretty. Credit is such an important part of the entire economy that it's almost impossible to figure out all of the ramifications of a near total credit crunch. Plenty of companies rely on commercial paper and short-term, low risk loans to finance certain operations, while others use it to get a small, but safe, return themselves. If that were to completely collapse, money would have a lot of trouble moving from where it is to where it would be most efficiently put to work for the economy. Effectively, important projects would get starved of necessary cash and die.

That may happen to some projects all the time -- and it's a natural part of the market -- but if it happens across the board, a lot of companies could go bankrupt. A lot of useful investments would go to waste, and (more importantly) the next set of important projects that require investment wouldn't be able to get the necessary money. It would shrink the economy and harm pretty much everyone.

But won't that be an opportunity for someone else to lend?

Yes, indeed. And that's what many free market supporters are betting on. There is still money out there, and it can be put to work. The trillion dollar (plus) question at this point is how much of that money really is out there and how quickly can it flow through the economy (and at what price). Some argue that since so many companies rely on lending out money to make money, that the idea that it would cease is almost impossible to imagine. And that's true to a certain extent. There will always be some money out there to lend, but the question is how much and at what price. With too little at too high a price, you end up with significant portions of the economy screeching to a halt.

While the markets are normally quite efficient, you do get periods of... irrationality. Mostly, we think about it from the "irrational exuberance" side, which leads to bubbles. But it happens at the other end as well, though usually to a lesser extreme. If almost no one's lending, the result is a bit of a herd mentality, where very few people want to be the first to step out on that ledge, as they're afraid that the ledge will get quickly chopped off. Some daring souls may step out, but will it be enough to really keep the economy chugging along?

That sort of "crowdthink" risks severely thinning the amount of capital moving around the economy. Even if certain companies know that they should be lending the money they have sitting idle, they'll be too afraid to step out on the ledge since no one else is doing it. Those in charge of making lending decisions start thinking: "what do they know that we don't know?" -- and that mentality paralyzes the lending market.

So, what does it all mean for a small business operator?

Well, that really depends on what sort of business you're in. If you're a venture-backed startup, it's probably not as big a problem, immediately. As we originally noted, top tier VCs are pretty secure with the funds they have, and as we saw after the dot com bubble, the big institutional investors still can't resist allocating a segment of their cash to VC funds. That money is pretty safe. A good venture capitalist should help its portfolio weather the storm. By the way, that doesn't mean showering them with too much cash. Companies that have raised a ton of cash aren't necessarily better off, contrary to popular opinion. A lot depends on what business they're in, how focused they are on an actual business model and how much they're actually burning. As we saw after the last dot com bubble burst, it was some of the most heavily funded companies that went belly up first -- because they had focused too much on raising money and not on building a business.

But, of course, venture backed high growth companies are a tiny, tiny segment of the small business arena. Most small businesses will face a different set of challenges. While they may not rely so heavily on regularly tapping into borrowed money, that doesn't mean they're not exposed in many ways. Any sort of expansion capital will be much harder and much more expensive to get. That will make it more difficult for some of those small businesses to make the investments necessary to become big businesses.

More importantly, their own customers may be exposed as well. Many small businesses effectively provide "loans" to their customers, in giving terms of payment, such as net 30 or net 60 (allowing the customer to pay within 30 or 60 days, rather than upfront). Unlike constantly fluctuating interest rates, small businesses generally don't change those sorts of terms with any regularity. So, many small businesses actually become a lot more exposed: they're "lending" money at the same rates as before, while the rest of the money flowing around the economy has become more expensive.

With that happening, more customers can be expected to default, putting more pressure on the cash flow of the business. And hiccups in the cash flow will be harder to overcome in the usual way: it will be more difficult and expensive to get a small business loan or a line of credit. Thus, it becomes more difficult to meet payroll and could result in layoffs. Companies may also try to tighten up their payment terms, but that effective "raising" of the interest rate can scare off customers, as well. Already, we're seeing small businesses being advised to push for early payment and change the terms of payment they offer customers.

Most of this won't happen immediately for most businesses. It certainly will impact some in the very near future (and a few companies are already experiencing problems). The real worry is the cascade effect of this happening to more and more small businesses, putting even more pressure on the overall economy. More companies having cash flow problems means fewer customers for other companies, as well, accelerating the whole cycle.

So what do you do?

If you're a small business: focusing on cash becomes king (it should always be, but even more so at this point). Companies won't be able to rely on lines of credit as much as they have in the past, and should see what can be done to lock in any kind of line of credit or opportunity for a decent loan if they can get it. Basically, companies need to prepare themselves for the possibility of money not flowing, customers not paying and additional economic hardship.

But, beyond that, as with any such situation, new opportunities open up. It really depends on what business you're in, but if you provide a product that is better/cheaper/more efficient than what others are using, this becomes a sales opportunity. Focus on letting customers know that they can conserve cash by using your product instead. Plus, look for new areas that you can invest in safely and cheaply, recognizing that these sorts of financial messes do pass, and there will be tons of opportunity on the other side if you can grab it.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
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    M. Slonecker, Oct 2nd, 2008 @ 12:59pm

    Your Article

     

    reply to this | link to this | view in thread ]

  2.  
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    M. Slonecker, Oct 2nd, 2008 @ 1:13pm

    Re: Your Article

    Hit enter instead of tab to go to the comment box.

    This is a very succint article and well stated. It should be a source of pride that AMEX reposes such trust in your view of the current financial situation.

    Personally, the greatest fear I have is that Congress will actually pass a "Bailout Bill" laden with just enough "goodies" to sway favorable votes from some of those currently sitting on the fence or opposed.

    One of the very first lessons I was taught by my mentor was to resist the urge to immediately do something...anything...simply because a client perceives having a problem. In many instances the best course has been to simply sit back and do nothing, waiting to see what develops. In the large majority of such instances these perceived problems resolve themselves quite nicely without legal internvention. Nothing in the current "crisis" suggests to me that rapid intervention is necessary to alleviate the situation.

    We may disagree on some issues, but I do believe we share a belief that "ready, fire, aim" is not a particularly helpful response.

     

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  3.  
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    Colin LeMahieu, Oct 2nd, 2008 @ 1:17pm

    Mitigating risk

    Another thing to consider is the implications of government subsidies to keep credit institutions in business. As stated above, the restraining factor in extending credit is a risk assessment. What is the estimated return on extending this line of credit, taking in to account that the debtor might not be able to pay it back.

    While on the cover forcing the US tax base to extend credit to banks to prevent a credit freeze may seem like an immediate solution, it changes the formula for risk calculation. If people and companies perceive less risk when extending credit, because the government may force the tax base to absorb the cost, they will start extending more credit. Since the lines of credit were already extended too far, this is what caused the current crisis, further lending will simply make the issue worse. One could speculate the unscrupulous might bake in a probability of government buyout in to their risk assessment, forcing the government to absorb some of the risk they're taking on investments.

    The economy doesn't depend on credit, it depends on a reasonably consistent level of productivity. Businesses assume their suppliers and purchasers will follow a predictable level of productivity so their business can remain intact. Businesses that depend on a supply of money as an input material finding their money input gone will have as hard of a time as if any of their other supplies were gone.

    How is this situation solved? Something has to give. There's no magical answer, the situation arose because actual economic productivity didn't match expected productivity to such a degree that people are no longer trusting some institutions to make investment estimations anymore, the businesses that are going bankrupt. No amount of political posturing or debating will insert productivity in to the economy. If it were a small productivity mis-estimation it could be absorbed by the economy through forceful reallocation; systemic mis-estimations will not be easily absorbed.

     

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  4.  
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    Matt, Oct 2nd, 2008 @ 1:33pm

    My problem: why the immediate panic?

    Sure, okay, get things done, do it right.

    However, why is this magically an issue over the last week that a: wasn't there before, and b: has to be shoved through the white house as fast as possible?

    Also, why are pork bills being added just to get this to pass?

    This tells me that the crisis is not what we make it out to be. Market isn't going to die overnight.

     

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  5.  
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    Tim, Oct 2nd, 2008 @ 2:01pm

    No Money

    Talking to my neighbor last night about this mess, he was reminded of his childhood. He's 70+ right now. All he heard growing up was about the Great Depression. It was a constant drum beat. He finally asked an "old timer" what all the fuss was about. The "old timer" simply said there was literally no money, no physical bills. Back then people who had money hoarded it, kept it out of circulation. Maybe due to fear. Seems like we could be ending up in the same place but via a different route if the credit market's don't loosen up and people don't act rationally.

     

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    David (profile), Oct 2nd, 2008 @ 2:09pm

    Hopefully this will spark an awakening

    It will require the people to realize their money supply is not controlled by them and why it's important that control is.

     

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    Haywood, Oct 2nd, 2008 @ 2:16pm

    Some perspective

    I keep hearing about how small business can't operate without credit. Sounds like poor management to me. I keep seeing these owners being interviewed,saying; how they can't make it trough the slow times without a line of credit. Perhaps they should lay a little back during good times toward the short fall of slower times of year. I was shocked to hear they were using their line of credit to make payroll. Apparently business has changed since I was a kid, with that approach they might as well work for someone else, the alleged profits they make are all going to the bank.

     

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  8.  
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    Mike (profile), Oct 2nd, 2008 @ 2:31pm

    Re: Re: Your Article

    This is a very succint article and well stated.

    Given our previous, repeated clashes in this space, I appreciate the kind words.


    We may disagree on some issues, but I do believe we share a belief that "ready, fire, aim" is not a particularly helpful response.


    Indeed. Though, seeing the bill that's coming out now, it appears that the response has been "ready, fire, aim, miss, load down the gun with pork, fire again!"

     

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  9.  
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    Jim Harper, Oct 2nd, 2008 @ 2:35pm

    Updates on Hill Action

    In case it's helpful to folks, I've been sort of liveblogging the debate on bailout legislation. (Today - no promise that I can cover all of it.)

    Most recently, Spencer Bachus from Alabama (R) is arguing that the Congress could appropriate a few months worth of bailout money and then come back and see how it's going. That's a lot less expensive . . .

    Follow posts on Twitter, too. TwitterID: washingtonwatch

     

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  10.  
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    Mike (profile), Oct 2nd, 2008 @ 2:37pm

    Re: My problem: why the immediate panic?

    Sure, okay, get things done, do it right.

    Absolutely agree.

    However, why is this magically an issue over the last week that a: wasn't there before, and b: has to be shoved through the white house as fast as possible?

    Well... there are two separate issues there. Things are different that weren't there before, which is that institutions started failing, which has made the cost of credit much higher quickly. The question is if that started the dominoes falling.

    So I can understand the reaction to try to act quickly.

    What I don't understand is why they couldn't do a small triage solution first to stabilize, followed by a more well thought out response.

    Also, why are pork bills being added just to get this to pass?

    That scares me too.

     

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  11.  
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    Ben (profile), Oct 2nd, 2008 @ 2:55pm

    Re: Some perspective

    Consider the case of a furniture small-business. A purchaser for a company comes into the shop and arranges to have a bunch of shelves / desks / etc delivered to their office. Payment under those conditions might be Net30; they have 30 days to pay -- that's giving the customer a line of credit, which gives the customer time to arrange for financing (or rearranging their cash flow) to handle this decision to buy furniture.

    The owner of the furniture store, however, received the goods from its distributor (unless they make the furniture themselves, in which case it is the lumber mill), and there they also probably have a Net30 arrangement. The distributor _must_ do it this way in order to move their goods; by doing so they give their customers the capability to have stock on hand to show /their/ customers.

    Yes, if you have a good stretch of sales, you probably can set money aside. If you are a new business you do not have that luxury. If your business is growing (opening a new store means you have to _stock_ that store, and Net30 will only help a little in keeping it stocked unless items are flying off the shelves) your money is tight because it is invested in the non-performing start up costs of a new store.

    No credit means businesses won't grow, won't start, and will have trouble continuing because their customers are less likely to be making purchases without the flexibility credit provides them to manage their cash flow.

     

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  12.  
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    MATT, Oct 2nd, 2008 @ 3:04pm

    Re: Re: My problem: why the immediate panic?

    Man, sometimes I type my name in with caps lock by accident. Bigtime work habit :D

    I agree, it can get bad fast. However, how was this not indicated for I don't know, last 4 weeks? We all have been screaming "DEAD CAT BOUNCE" for about that period of time.

    Also agreed, a triage approach would certainly be feasible. 50B is a lot of money, but not something to refuse. However, 700B? Plus the porkers? I find it blatantly insulting and also am disappointed that it's kinda hard to hold the entire senate and house accountable for this; you know they thoroughly rig their own reelections all the time anyway. Meanwhile, public refuses, and they go right on their way? So who can be held accountable?

     

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    Mike (profile), Oct 2nd, 2008 @ 3:11pm

    Re: Re: Some perspective

    No credit means businesses won't grow, won't start, and will have trouble continuing because their customers are less likely to be making purchases without the flexibility credit provides them to manage their cash flow.

    Bingo!

    Great explanation, Ben.

     

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    Rose M. Welch, Oct 2nd, 2008 @ 3:44pm

    It doesn't matter if the house is shaky. Opportunity knocks on the door.

    But, beyond that, as with any such situation, new opportunities open up. It really depends on what business you're in, but if you provide a product that is better/cheaper/more efficient than what others are using, this becomes a sales opportunity.

    *grins*

    I've gotten several new clients in the last few weeks because of that. You see, I don't charge for a web design. I give the design away for free, and charge for hosting. In the event that a customer doesn't pay, the domain redirects to my website and I've lost hours of work. (Who doesn't in a start-up?)

    I've gotten clients that were unsure about the need for a website because the average initial cost seemed like a big investment for something that they weren't really convinced about. Those are the best, because they are happy to pay the monthly hosting charges and (after the first few months) they're my biggest clients for search engine optimization plans and web presence monitoring, which is a per hour fee.

    I think that now, with the Internet being such an important medium, more people are going to use it for price-checking and information gathering, meaning more business are going to need to be on the Internet or to be better on the Internet, which means more clients for me.

    Hmmm. Opportunity and a model with free. I guess I just hit all of the Techidrt hot buttons today... :D

     

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  15.  
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    Anonymous Coward, Oct 2nd, 2008 @ 5:51pm

    Musical Chairs

    Maybe I am too quick to criticize the bill. Some call it bailout, others call it hipocracy, but the neat thing about it is that Congress is made up of fewer people so it's easier to single out strategies being pushed forward.

    The Los Angeles Times has a fascinating article titled "When is Pork considered Kosher?" It seems that this is a deliberate attempt to buy votes from the House for political gain, but at the expense of taxpayers. This in itself is quite concerning.

    This Bill's strategy is all wrong, and the House knows it.
    It seems that there's an some common axiom between all these failures. It seems banks have been using CDOs and CDSs as an inexpensive way of doing business without having to go to the Fed for an overnight loan.

    This benefits financial institutions because it's cheaper to do business based on a collateral-based item such as the title to a house, a car, or otherwise instead of trading in a common currency such as the Dollar or Euro. For a while, this worked, and worked great-- It increased the ability to lend because overnight loans were settled on CDOs or CDSs instead of dollars. These Financial instruments were treated as cash, as they held value to those within the banking and insurance industries.

    Now, interject into the mix a 12-year high of US unemployment, and suddenly bills don't get paid. As a result, these CDOs and CDSs lack their original value because financial institutions are unable to create their expected income (ie Derive, or Derivatives) from these financial instruments, and subsequently decide to pull back on using them as a common underlying currency.

    If I'm able to sell these financial instruments to taxpayers for $0.80 on the dollar invested, it still leaves me with a $0.20 on the dollar deficit. Now, this addresses the main question of being able to lend between other financial institutions and may even allow me to continue to leverage A paper as a form of currency, but the net effect on the credit market may ultimately be negative. So to make up the $0.20 on the dollar deficit, I may increase interest rates among my base customers so I don't post a negative quarter and my stock doesn't decrease in value.

    What an incredible dilemma. It seems like the best answer is to possibly put these CDOs and CDSs on a government-based parking lot and decrease the Fed overnight lending rate, while also decreasing the amount of the Fed's "$612B emergency infusion" that was put forward last week.

    Another problem is a stigma still lingering from 9-11. You may recall after 9-11, Bush made a case for buying into American Companies because when we buy Non-American, apparently we somehow fund the terrorists. But this ideology affects mainstreet as small business owners are having an increasingly difficult time competing with the WalMarts, Exxons, Clear Channels, Citibanks and companies who have a national distribution or execution strategy. Big business wins, and Big business can buy votes.

    But what's overlooked is that small business has always been the cornerstone of our national economy, paying the most in tax which keeps this country running, providing personalized service, and taking care of employees. But somehow, in the past 8 years a huge transfer of wealth from 1st Street to Main Street occurred. I firmly believe a move from Main Street to 1st street needs to happen. This can be accomplished by again creating Clinton-era opportunities for small business.

    Congress can help by removing this stigma that if I visit the local Bar somehow I am unpatriotic if it doesn't have a "TGI Friday's" sign out front.

     

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  16.  
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    Jeano, Oct 2nd, 2008 @ 6:05pm

    Many many businesses depend on short term operating loans. It helps business flow smoothly. Sometimes payroll (your paycheck) is paid out of an operating loans (1 day loans). If you have a business that doesn't use credit, it is probably that your suppliers or customers depend on credit of some sort.

    Many school districts depend on credit because government payments to schools can lag 6 months after funds were needed and spent. (Surprise - govt is late in paying)

    The need for credit percolates through the whole economy.

    In essence the bailout is for the American way of life, not wallstreet.

     

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    LBD, Oct 2nd, 2008 @ 8:09pm

    Interesting Economics debate

    The whole 'loss of credit is a bad thing' is tied up to supply side economics. We all know this 'if the companies go out of business jobs will be lost' and all that.

    If no depression occurs after this, it will be the coffin nail in supply side economics. So it amuses me that the supply side 'supporters' the republicans were against the bailout, given that if no great depression occurred after the bailout, supply side would be over. I mean, totally and completely disproven.

     

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    LBD, Oct 2nd, 2008 @ 8:14pm

    Re: Interesting Economics debate

    Though one must keep in mind that if the depression occurs after no bailout that does not prove supply side economics. There are many reasons for a depression to occur. There are few reasons for a depression to fail to occur. Supply side economics being wrong is the only reason I can think of for a depression to fail to occur.

     

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    Anonymous Cowherd, Oct 2nd, 2008 @ 9:02pm

    Ah

    But, beyond that, as with any such situation, new opportunities open up. It really depends on what business you're in, but if you provide a product that is better/cheaper/more efficient than what others are using, this becomes a sales opportunity. Focus on letting customers know that they can conserve cash by using your product instead.


    Ah! This situation has created an opportunity for open source to finally destroy Microsoft once and for all! Muhahahahahaha!

     

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    Anonymous Coward, Oct 2nd, 2008 @ 10:09pm

    Links

     

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    Mike (profile), Oct 2nd, 2008 @ 10:45pm

    Re: Interesting Economics debate

    The whole 'loss of credit is a bad thing' is tied up to supply side economics.

    Um. No. It has nothing to do with supply side economics actually. Supply side economics is mostly a myth anyway. It's tough to find an economist who actually ever believed in "supply side economics." It was a political invention.

     

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  22.  
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    Colin LeMahieu, Oct 2nd, 2008 @ 11:44pm

    Re: Re: Interesting Economics debate

    Supply side economics is a term used to criticize political opinions, It isn't an actual accepted economic model.

     

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  23.  
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    Ppitstop, Oct 3rd, 2008 @ 3:47am

    So How Will The Financial Crisis Impact The Wider Economy?

    Since when was the financial sector not part of the economy.

    The economy does not differentiate between good honest hard work making something with your hands and and moving money around and you move oversees companies around that is an export.

    So at a time when manufacturing goes oversees Wall Street is still one of our biggest exports. They go away and that is a lot of money taken out of the economy for you and me.

     

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  24.  
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    Scott Lithgow, Oct 3rd, 2008 @ 3:51am

    So How Will The Financial Crisis Impact The Wider Economy?

    Credit is not bad if used wisely.

    If I talk to a customer and they say can you do that for me, I say yes but I need to buy a big machine so give me a contract and I will do it.

    I buy the machine as the contract gives me a return but need to use credit initially as a big machine costs big money.

    I pay for the machine from the profit, The lender makes a profit and the customer get what they want.

    QED everyone wins.

     

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  25.  
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    Twinrova, Oct 3rd, 2008 @ 4:17am

    Wow. Simply, wow.

    I am absolutely appalled about the sponsorship of AmEx toward anything Techdirt does. To write up information regarding the economy and then proudly stating its sponsored by one of the companies who put the economy where it's at is absolutely.... ironic (yes, I'm being nice here).

    With that said: Since the first article, the senate approved the stupid idea of bailing out the industry which means it has a pretty good chance of passing the house.

    Now that this article appears, there's another vote tonight. Again, I'm personally hoping the bill fails miserably, the stocks crash over 777 points, and the world wakes up to a "WTF" moment on Monday.

    As with most people living day-to-day, we're not economists but we certainly know when we're being fed propaganda about this crisis. Despite all the "analysts" stating this bill is "necessary", constituents are calling in to tell their representatives "NO!" on this bill (amazing how few listen).

    The taxpayer is the one who suffers no matter how much spin one puts on the "need" to infuse cash into a hurting economy. The taxpayer's taxes go to waste and, in the long term, they'll pay for it again when banks go right back to their idiotic rate plan in lending money (charging more for the riskier lenders).

    What really pisses me off is how lenders are crying foul when they didn't give a damn to turn around and raise every cardholder's minimum payment to 4% after they lobbied congress for better bankruptcy protection.

    I'm also not happy when lenders give people false impressions they can qualify at "X" rate, only to be told their credit doesn't qualify them for the rate (which is damn near impossible, given 80% of borrowers are subprime).

    This bailout is no different than the consumer being punished for changes which they, themselves, did not create. Why did millions of people have to pay for the few who made the mistakes? Why is this a recurring cycle?

    Americans are complete idiots at times when it comes to credit. They don't understand interest, they don't understand ARMs, and they certainly don't understand the consequences if they're late. All they see is the "bottom line" of what they have to pay for per month.

    Due to this, Americans don't think "big picture" when it comes to finances. They merely think "Oh, $20/mo? I can afford this" without realizing their impulse buy of that $1500 television will actually cost them nearly $3000.

    Because it's done at $20/mo. The financial world should have known better. Instead, they've borrowed money because they can pay it back at "$20/mo", but when their investment failed, it's just as similar to a person losing their job.

    All of a sudden, that "$20/mo" goes away and the outstanding amount now dawns on them. Always, always after the fact.

    I can't sit here and tell you I fully understand all the issues which went into this fiasco. In fact, I don't believe anyone can. But to think the housing market was a significant cause to this? Sorry, I just can't accept this.

    People have been defaulting on homes since the first mortgage lender was introduced. Sure, these past few years saw an increase in these defaults, but did this really have such an impact that the rest of the on-time lenders didn't help cover the losses?

    Surely this can't be. Because if it is, then what I can deduce is that my interest is being used not to help others get loans for their homes, but instead, taken to play on the ponies.

    They lose. I lose (I can't even get a home equity loan). I can see how this will propagate into everyone losing, but it shouldn't be everyone who fixes it.

    I admire your attempts to educate people, but you're doing it from the wrong side of the fence. You're a business and you have much more to gain than many consumers out there who have simply stopped buying.

    Consumers need help and the lending industry needs to change its ways or this entire fiasco of economic crashing will cycle again, but much faster.

    This bailout program is no different than giving a compulsive gambler money to restart their life.

    It will fail because the same actions will continue. It will fail because once the money comes rushing back in, interest rates will increase to get it out there. That notion of "$20/mo" will return and consumers will continue to have no idea what happens with the interest they pay on the loan.

    To touch base on small businesses, again, why does it matter? It seems big business is all anyone cares about, especially given they have the power to buy small businesses (screw them up, and then sell them). Sure, Mom & Pop stores need credit, but why is it they're the ones who have to pay more for their loans?

    Uh oh, I see a trend here. Big business dominates. It always has. It always will. Anyone who believes this bailout is necessary is completely ignorant to the true cause and effect. Anyone who supports this bailout has personal interests they can't afford to lose money on. Anyone who signs this bailout should take a look at themselves and ask "Why did I let this happen?". I guess they don't care given their position in government is about to end.

    You still have time to call your representatives and voice your opinion but remember one thing if you're voting "pro bailout": You're going to pay for it in much more ways than just your taxes.

    Are you willing to take this chance again when it failed the last time? Or do you really not remember what caused the Great Depression?

     

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  26.  
    identicon
    Twinrova, Oct 3rd, 2008 @ 4:19am

    Damnit! We need an edit button!

    The above post didn't do this on preview. Sorry for the half bold.

     

    reply to this | link to this | view in thread ]

  27.  
    identicon
    AJ, Oct 3rd, 2008 @ 6:56am

    Re: Musical Chairs

    "Clinton-era opportunities"????

    Do you realize he started this mess? According to the NYTimes in 1999, the Clinton Administration put tremendous pressure on Fannie Mae and Freddie Mac to lower their standards for loans, another gub'ment attempt to steal from Peter to give to Paul (of which, you can ALWAYS count on the support of Paul!!). This road should have NEVER been taken and it just shows how the best intentions can go horribly wrong.

     

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  28.  
    identicon
    J.Locke, Oct 3rd, 2008 @ 7:54am

    Its a Crisis of LEADERSHIP

    Since so many people have seen this exact crisis coming, some for years but certainly an enormous amount for at least a year or better, why was a plan suddenly and hastily put together that needed to be rushed through the legislative process immediately (why haven’t they been working on this plan all along?). The answer is simple, America is suffering a crisis of leadership. That is predominantly what this is about. After 8 years of devastatingly inept and corrupt leadership, the United States is a bruised and battered ship, bobbing aimlessly through a storm and no one has much faith in our ability to actually do anything to help ourselves, much less anyone else . . . I hope we as a people get a lot smarter about who we vote for. If we don’t, I think we are looking at the beginning of the end of the United States of America as a serious economic power in the world (good thing we still got all those nukes).

     

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  29.  
    identicon
    Anonymous Coward, Oct 3rd, 2008 @ 7:57am

    Re: Re: Musical Chairs

    "Do you realize he started this mess? According to the NYTimes in 1999, the Clinton Administration put tremendous pressure on Fannie Mae and Freddie Mac to lower their standards for loans, another gub'ment attempt to steal from Peter to give to Paul (of which, you can ALWAYS count on the support of Paul!!). This road should have NEVER been taken and it just shows how the best intentions can go horribly wrong."


    Its sad that talk radio is still lying to the gullible with this crap. Just use your own head, think about the last 8 years, fight feeling stupid and recognize that you have been bamboozled into nearly destroying your own country through nothing more then jingoistic slogans and selfinterested promises. Grow up, your country needs you.

     

    reply to this | link to this | view in thread ]

  30.  
    identicon
    Anonymous Coward, Oct 3rd, 2008 @ 8:03am

    Re: Re: Musical Chairs

    True, and I was looking for a way to describe the value of the SBA, which seemed to just vanish. Surely they still exist...

     

    reply to this | link to this | view in thread ]

  31.  
    icon
    Mike (profile), Oct 3rd, 2008 @ 8:16am

    Re: Wow. Simply, wow.

    I am absolutely appalled about the sponsorship of AmEx toward anything Techdirt does. To write up information regarding the economy and then proudly stating its sponsored by one of the companies who put the economy where it's at is absolutely.... ironic (yes, I'm being nice here).

    Curious... how did AmEx cause the meltdown?

    Also, on the last post, we suggested that you learn a little economics, since it was clear that you were confusing concepts, and from this response it appears you have not chosen to do so and still speak from a position of ignorance. You are now blaming *credit* for causing the meltdown? Yikes. Try again.

    Finally, I'm not sure you understand the meaning of the word ironic. You might want to look that up.

    Twinrova, as far as I can tell, you seem to have an irrational fear of "big business" but have so far been unable to explain why.

     

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  32.  
    identicon
    DMNTD, Oct 3rd, 2008 @ 12:01pm

    I stopped reading here.

    Debt isn't a bad thing

     

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  33.  
    identicon
    Twinrova, Oct 3rd, 2008 @ 12:16pm

    Re: Re: Wow. Simply, wow.

    "Curious... how did AmEx cause the meltdown?"
    Are you telling me they didn't contribute?
    I am not so ignorant to believe they didn't have some hand in this. Granted, they're not to blame solely but when added to the rest of the businesses...

    "Also, on the last post, we suggested that you learn a little economics."
    Working on it. Please give me a little time.

    "You are now blaming *credit* for causing the meltdown? Yikes."
    Mike, credit is the problem here. When lenders give out money to risky ventures, that's credit. Mortgage defaults, failure to retain investment returns, financial institutions not paying back their loans, how is this not credit?

    While I'm still catching up on my reading, please educate me (and others).

    "Twinrova, as far as I can tell, you seem to have an irrational fear of "big business" but have so far been unable to explain why."
    I'll try my best to help you understand my "irrational fear" (although it's more frustration than fear).

    When a company attains a certain level, they're entire structure changes to reap profits, rather than stick to the core values which lead them to the newly attained level.

    Take eBay, for example. Once a small site dealing with auctions, they've now grown so large, every decision they make is now purely profit driven. Removing payment options? Ensuring buyers can't get negative feedback (enticing them to buy without reprisal), increasing rates?

    And eBay isn't the only big company which does this. It's as though there is an unwritten rule that states "When we get big, to hell with the consumer."

    Rootkits, DRM, price fixing, price gouging, restrictions, and a wide variety of other tactics to go against the consumer rise on a daily basis. Hell, even Techdirt blogs about many of these stupid things.

    Much of what you write about states in order to compete, one must be innovative. Makes sense, but when small businesses are often destroyed because of patent disputes, that hurts innovation (which you've definitely hit upon).

    I can't say every big business does this, but most of them do. For example, with media distribution, how is it every record label and movie distributor sells their ware at damn near the same price as their competition? Yes, this gives consumers no choice (not including price drops, sales, etc.). Small businesses obviously can't compete to offer media cheaper because the licensing fees are extraordinary.

    Let's take LEGO as another example. Hit the website, and you can clearly see some sets are priced rather well for what it offers. Now, check the Batman, Indiana Jones, and Star Wars sets and notice the cost on a per-piece basis. Rather astonishing when you see how big business (Lucas' company) dictates what the small business (and yes, LEGO is a small business) can do.

    There's a huge difference between greed and profits, Mike. I don't know if you'll understand my position on this, but our economic troubles are caused by greed. Quick rich schemes because of loopholes in what a company can and cannot legal do with their profits.

    As I've stated in my other post, there's no damn reason for the price of a loaf of bread to exceed $1. I understand why it exceeds such, but it shouldn't exceed such.

    And this is why I'm frustrated with big business. Cable increases, utility increases, tax increases, idiotic interest rates on loans, fuel increases, and sheer greed all get passed down to the consumer.

    You talk about innovation, but wouldn't it be more prudent to talk about changing the way big business does business to lead by example, instead of greed?

    There are always a few who can't/won't pay their bills, but the rest of us shouldn't suffer to which we are forced to watch our spending for the things we want to. And those who didn't/couldn't pay their bills is why you're spending an incredible amount of time posting about our economic woes and what will happen if things go the way they are.

    I've found some websites regarding economics and big business and plan to read them this weekend. If I still seem ignorant, forgive me. I get the basics. Now I just need to read with an open mind to determine if big business is really greedy, or simply trying to invest in their future.

    One more thing before I go: Ever notice how external forces cause an increase in price, but once the external force is removed, the price is never decreased?

    In the movie Mr. Mom, there's a great example of a company who tries to do good and even tells its consumers the cost decrease is temporary.

    When was the last time you've ever seen a company do that?
    I've yet to see it.

     

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  34.  
    icon
    Mike (profile), Oct 3rd, 2008 @ 12:43pm

    Re: Re: Re: Wow. Simply, wow.

    Are you telling me they didn't contribute?

    Yes, I'm saying they did not contribute. It's difficult to find any angle on which a credit card company contributed to the mess.

    Investment banks? I can see that. Real estate brokers? Sure, I can understand the arguments there. But, basic credit card companies? You've lost me.

    I am not so ignorant to believe they didn't have some hand in this.

    So you don't know how, but you're sure they did? You're shooting first and asking questions later. That's not a good idea.

    Mike, credit is the problem here.

    No, it's not. Credit, by itself, is perfectly reasonable.

    When lenders give out money to risky ventures, that's credit.

    Yes, and it's an amazingly important part of any economic activity these days. That's not a bad thing. Risk is good. Credit is good. What was bad was HIDING the actual risk, and making it look low risk when it was high.

    Mortgage defaults, failure to retain investment returns, financial institutions not paying back their loans, how is this not credit?

    You're throwing out the baby with a spoonful of bathwater. Credit wasn't the problem.

    When a company attains a certain level, they're entire structure changes to reap profits, rather than stick to the core values which lead them to the newly attained level.

    I have no clue what that means. Trust me, any business is focused on providing for its share holders. To claim that there's some fundamental change is simply incorrect. They may change strategies, which becomes necessary as you grow, but there's no change in core values.

    Take eBay, for example. Once a small site dealing with auctions, they've now grown so large, every decision they make is now purely profit driven. Removing payment options? Ensuring buyers can't get negative feedback (enticing them to buy without reprisal), increasing rates?

    eBay's early decisions were also pure profit based. They recognized at the time that small sellers were important to being PROFITABLE, so they catered to them. At the stage they're at now, they've decided that big sellers are what's important to be PROFITABLE. I disagree with them, but it's not a fundamental shift at all.

    Rootkits, DRM, price fixing, price gouging, restrictions, and a wide variety of other tactics to go against the consumer rise on a daily basis. Hell, even Techdirt blogs about many of these stupid things.

    Indeed, but the reason we point them out is because they're *stupid* things... and they're STUPID because they cause a company's reputation to diminish making it HARDER for them to PROFIT. Profit is not the evil. It's taking a bad route to profit, that will almost certainly backfire that's the problem.

    There's a huge difference between greed and profits, Mike. I don't know if you'll understand my position on this, but our economic troubles are caused by greed. Quick rich schemes because of loopholes in what a company can and cannot legal do with their profits.

    You can't do anything about greed. It exists. All you can do is change incentives. Blaming greed gets you nowhere. Changing incentives does.

    And that's got nothing to do with big businesses, small busiensses or credit.

    You talk about innovation, but wouldn't it be more prudent to talk about changing the way big business does business to lead by example, instead of greed?

    I have no clue what this means. It's the drive for profit that creates innovation.

    One more thing before I go: Ever notice how external forces cause an increase in price, but once the external force is removed, the price is never decreased?

    That's simply untrue.

    When was the last time you've ever seen a company do that?

    Decrease costs? All the time!

     

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  35.  
    identicon
    Twinrova, Oct 3rd, 2008 @ 5:40pm

    Re: Re: Re: Re: Wow. Simply, wow.

    (note: still reading up on both economy 101 and information regarding the crisis, so please bear with me if some things are a little... off)

    "Yes, and it's an amazingly important part of any economic activity these days. That's not a bad thing. Risk is good. Credit is good. What was bad was HIDING the actual risk, and making it look low risk when it was high."
    Therein lies the problem, Mike. Who was hiding what? That's the hardest question to ask here, because from the information I keep hearing, the fiasco stems from "Wall Street" (although it had a hand, I certainly do not buy into the fact it is solely, or largely, Wall Street's fault).

    I've been trying to find information regarding this "loophole" everyone's talking about, but not explaining. At any rate, one thing seems to be the consensus regarding this fiasco is that it all fell on "bad loans" which is why the gov't is bailing investors out.

    Note how it's bailing out investors. Is this wrong? If so, then blame the media for not helping us fully understand.

    I'll stop here until I can do more reading. I've extremely upset both senators from Indiana voted yes on this bill, so you can definitely bet I'm going to educate myself before writing my scathing letter to both of those idiots.

    "They may change strategies, which becomes necessary as you grow, but there's no change in core values."
    You do live in this country, right?
    I think my problem here is I'm categorizing all "big business" into one "target", and I agree it is completely unfair of me to do so.

    However, this doesn't dismiss my earlier stand that many companies change strategy to circumvent what made them large in the first place. Taking "necessary changes in strategy" is one thing, but making moves increase revenues by hiding these strategies is quite different.

    Wasn't your definition of the bailout fault due to hiding information?

    No different.

    "eBay's early decisions were also pure profit based. They recognized at the time that small sellers were important to being PROFITABLE, so they catered to them. At the stage they're at now, they've decided that big sellers are what's important to be PROFITABLE. I disagree with them, but it's not a fundamental shift at all."
    No argument here, but as I've stated, there's a HUGE difference at being profitable vs. being greedy. eBay's recent changes have absolutely nothing to do with profits but more to do with simple greed.

    "Profit is not the evil. It's taking a bad route to profit, that will almost certainly backfire that's the problem."
    The root of my frustration regarding "big business". Big business tries, and fails, to make these changes and, as your blogs indicate, many follow suit even if it leads to failure!
    And I shouldn't have a problem with this? What avenue would we, the consumers take, when there's absolutely no other choices for us?
    Re: If DRM is used and my DVD player doesn't work with it, what other choices do I have to own the movie? This is just an example of many.

    "You can't do anything about greed. It exists. All you can do is change incentives. Blaming greed gets you nowhere. Changing incentives does."
    Mike, these incentives are becoming more rare every day. Many consumers don't have options to change incentives.
    And you're right. Blaming greed is getting me no where which is why I'm trying to understand, as with many others around the world.

    Side note (related?): Brighthouse Networks recently dropped a carrier who offers CBS to cable because Brighthouse feels it shouldn't pay for something that's free over the air. I wrote an email stating "Then why do I have to pay $20/mo to get CBS HD?" Awaiting word.
    Where's my incentive change here? Satellite? AT&T's Uverse? (I'll NEVER go back to AT&T.) Then I'm back to finding a broadband supplier (none in the cable speed range and, ugh, AT&T's DSL) and having to pick up SBC (with AT&T long distance) for phone service.
    No offense, but I left these companies because of their "greed" and now look what's happening! Advice?

    "It's the drive for profit that creates innovation."
    Isn't this backward? ;)

    "Decrease costs? All the time!"
    All the time? Examples?
    Note: I'm not talking about forced decrease in costs due to competition, such as DVDs. I'm talking a decrease in costs due to less costs in production.
    Example: Cars are made with cheaper materials (and less labor due to the replacement of humans for robotics) but the cost doesn't drop.

    Well, I'm off for the night. Please don't think I'm arguing with you just to make a point. I'm truly trying to understand here and everything I keep reading only gives me parts and pieces, never the "full story".

     

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  36.  
    identicon
    Gene Cavanaugh, Oct 4th, 2008 @ 2:26pm

    Debt is a good thing

    I would agree if debt is incurred to promote the economy or do other useful things; but incurring debt to kill innocent people (the Iraq war) or for Welfare for the Wealthy (WFW) is a very, very bad thing.
    Ronald Reagan (in my opinion, second only to Bush in all time bad Presidents) sold us on "trickle down". The wealthy are still "trickling down" on the rest of us - feel the moisture?

     

    reply to this | link to this | view in thread ]

  37.  
    identicon
    Twinrova, Oct 6th, 2008 @ 5:09am

    Re: Re: Re: Re: Wow. Simply, wow.

    "It's difficult to find any angle on which a credit card company contributed to the mess."

    As promised, I spent the weekend reading up and trying to understand what caused this current financial mess, and while quite a bit was still over my head, I did understand the concept quite well and can now interject on exactly how the credit card companies contributed to this mess.

    In 2005, the US bankruptcy laws changed. While this may seem insignificant, it has a HUGE IMPACT of the troubles today.

    Shortly after the law was changed, most credit card issuers raised their principal minimum percentage from the previous 2% to 4%. While this increase doesn't sound like much, to the average credit card holder, this was significant as it raised their monthly payments. A "standard" payment of $35/mo was raised to nearly $90 (note: interest rates affect this monthly payment).

    This change was to "help" consumers pay off their credit debt faster. With the average interest rate at 14%, this was indeed a significant blow to consumers, who hold on average 3 credit cards. The average rate increase per "household" added nearly $200/mo in extra payments.

    Anyone in credit knows what this means. It changes several factors, such as the credit score and the debt-to-income ratio. These two factors alone have helped place millions more into the subprime lending category.

    Fast forward 2 years. With these factors now in play, the ARM increased in its use. As I've stated before, people don't truly understand interest rates, how they work, and look more to the "what I pay per month" as opposed to any future consequences in signing away their "life".

    You mentioned, from a higher position in the food chain, that investors where given information but much of it was "hidden". To a point, I can agree with this but it was the consumer who also didn't get this information. Many consumers, during the ARM discussions, were told not to worry about the forthcoming increase as they can simply refinance their current mortgage. As you can clearly tell, many signed the contract not realizing the housing market would make their refinance an impossibility.

    The rest, as we can all agree, is "history".

    As for my attack on American Express, you can say that they, to, had a hand in this when raising the principal minimum balance (note: Not every consumer was given this increase based on credit report information).

    But it doesn't stop here. Many consumers don't know of the devious tactics taken by credit card companies. Interest rates would skyrocket to the legal limit of 23.99% for "no apparent reason" until such action came about to determine increases were caused by "competitive" notions when it was found consumers carried other credit cards.

    To make matters worse, many credit card companies took it upon themselves to omit the high credit/limit information when reporting to the credit bureaus (check your credit report folks!!!), a practice still in use today.

    This has an incredibly huge impact on the score as it pertains to outstanding debt the consumer may or may not have. Credit scoring takes into account all the open accounts and calculates, as best it can with the information provided, the score. With no high credit/limit amounts available to calculate, it automatically assumes the maximum balance as the high credit/limit, dropping the score of the consumer.

    You may think these companies had no hand in this, but boy, are you mistaken. In all the reading I've done, I do not find it a coincidence the ARM increase started just after the credit increase, causing this entire fiasco.

    Now granted, I don't believe they are the sole contributors to the mess, but evidence clearly shows once the train is in motion, it is damn near impossible to stop on a dime. From there, lenders took big risks giving money to people who just couldn't afford the payments, and now we've all been duped into bailing these idiots out.

    I am also not willing to retract my statement greed was involved. If anything, greed was definitely the culprit here when companies played onto consumers' concerns about ARMs but gave them out anyway in order to capitalize on the incredible markup on housing. It begs the question: Who was really hiding what from whom?

    What I find absolutely incredible in all my reading is how delicate the mortgage world is. I can not fathom how a few bad mortgages lead up to this. I can not find any information regarding the number of default accounts, but merely the percentage increase of these defaults. There's a huge difference in the two numbers, as one actually reflects the number in default while the other represents an increase within the number of defaults.

    "The number of defaults have increased over 36% in the past few years".

    Think about this a second because this type of news can most definitely affect the economic world.

    If the 36% rise only includes the less than 2% of those defaulting, that's nothing and the rest of us who pay our bills on time will have covered the defaults with the interest we've paid. Instead, the context was taken out of hand to say that the 36% was included with all mortgage accounts, and this simply was not the case.

    I have yet to see any information regarding the percentages of those who foreclosed compared to the market as a whole. No where. Nada. Zip. Zero information. And believe me, I've looked. Any link, I've clicked. All the websites I've read clearly state the increase from the foreclosed side, never the market as a whole.

    I'm still learning about the causes after the lending, and I'm getting a bigger picture idea. Terms like "commercial paper" have me stumped (isn't this just a legal IOU?) because this definition seems to change with every website I've visited. One thing is clear, though, it seems the influx of cash, once it started going soft, caused the investment returns to shrink, forcing monies to be pulled back and retained. Ouch. That did hurt us.

    Well, if I've missed anything, please let me know. I'm still open to suggestive reading, so if you want to debate my point on all this, links are welcome to get a further understanding.

    Because until then, I stand by my original statement the credit card industry facilitated this mess all through cause and effect in the credit world.

    Oh, and one more thing, Mike:
    Bailout II?

    While AmEx may be okay, imagine what's going to happen when other card companies do the same thing to remain competitive.

     

    reply to this | link to this | view in thread ]

  38.  
    identicon
    Laurence Hurst, Apr 15th, 2009 @ 8:05am

    Car Insurance Cleaning up $$$$$

    I was laid off. My car insurance lasped by 14 days. My car insurer raised my rate from $89.00 a month to $400.00. The company said it was because of State policy. Is this a hoax, is Geico Insurance taking advantage of me?

    Laurence

     

    reply to this | link to this | view in thread ]

  39.  
    identicon
    Laurence Hurst, Apr 15th, 2009 @ 8:05am

    Car Insurance Cleaning up $$$$$

    I was laid off. My car insurance lasped by 14 days. My car insurer raised my rate from $89.00 a month to $400.00. The company said it was because of State policy. Is this a hoax, is Geico Insurance taking advantage of me?

    Laurence

     

    reply to this | link to this | view in thread ]


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