So what is the current economic problem, and what does a solution look like?

The Coffee Shop
1

So… we all seem to agree there is a crisis, but we don’t agree on the solution. Can I ask some more basic questions, now that the dust has settled a bit (or we’re getting used to having it in our eyes):

(1) What is the current economic problem
(2) What is the anticipated (future) problem
(3) What does a solution look like - I mean what are the best hoped for consequences of a successful solution, not what approach could be succesfull

My best guess is:
(1) That money has stopped moving. Which can is related to the freeze in credit markets, the reduction in spending by business and individuals, and the loss of jobs related to the two.
(2) That money will continue to not move when all of (1) continue to happen, leading to deflation, massive unemployment, homelessness and civil unrest…
(3) At the simplest level that money starts moving again. Some job losses seem inevitable so full employment is an unrealistic goal, some businesses will collapse, and in general it seems that inevitably some people will be badly hurt. So does a realistic solution only hope to minimize this?

2

Saying that “the money has stopped moving” is a little too simple IMO. We’ve had trillions of $ worth of financial fraud along with unprecidented borrowing on both a personal and government level. IOW we’ve been propping up our economy since the dotcom crash with borrowed money. Now we have to pay off the personal debt… or at least not acquire anymore. A lot of people will default on their loans, and many more will reduce consumption, which will reduce production, more people will be laid off, repeat, etc.

The federal government however is not restricted by reality and can keep printing “money” to bail us out. Unfortunately that is just putting even more “on the card” that we will eventually have to pay back one way or another.

I think we are screwed any way you slice it for many years to come. There is no “solution”… and yes I think that the people who are involved in “fixing” the disaster, only hope to minimize the chaos.

3

The following is an analysis of a person with little to no expertise in economics…so take it FWIW :slight_smile:

(1) What is the current economic problem

Simple stated, we have for decades been “Subsidizing” either thru exploiting cheap foreign labor and markets or thru government intervention and regulation a lifestyle and growth rate that can’t be sustained.

What we have been doing is been trying to live a somewhat twisted “Free market” that does not allow failure or “Market corrections” in general. For every correction we come up with some bandaid to maintain the teetering balance. Lower interest rates, lower lending criteria, lay people off, ship to foreign cheap labor markets etc etc.

In and of themselves none of these things are poor market practice but when used in conjunction with each other to prop each other up rather than used to create productivity you end up with as scenario of paying one credit card off with another rather than borrowing money to invest and create wealth. Very subtle difference in the short term, devastatingly different effect in the long term.

(2) What is the anticipated (future) problem

Politicians and most Americans refuse to allow a real correction. Politicians simply can not afford a real correction because it would expose the charade they’ve been carrying out for decades and that is the idea that they can “Direct” and “Control” the markets. They can’t, if and when they fail to, at this end the populous will realize they can’t and will look elsewhere. What they will realize is that THEY are the market and that THEY direct and control the market…there by severely curtailing the need for government and government intervention.

When this will happen, I have no idea.

(3) What does a solution look like - I mean what are the best hoped for consequences of a successful solution, not what approach could be succesfull

Simply let the cards fall where they may. Human nature is what it is and the markets will go where they need to go. A person that had an XBox 360 won’t suddently say “Ehhh…don’t ever want that again”. The second they loose it they will want it back and will do what they need to in order to get it back.

The further you fall the stronger the desire and drive. In short the market, at some level, people, at some level, will regain a REAL WORLD balance, again.

Again I have no idea where that balance may be. Whether it’s living in caves, world starvation and massive death or simply a few percentage points off of GDP, smaller houses and one car per home rather than two.

What I do know is that government doesn’t know either and that whatever they attempt to do will only create another false floor.

~Matt

4

This is a softball. Here is my responses:

Current Economic Problem: The markets (debt and equity) have zero confidence in Obama or Congress
Future Problem: We’re stuck with the current adminstration for 4 years, we’ll start flushing Congress next election cycle
Solution: Plenty of great opportunities for individual investors or companies with solid balance sheets, pain for most others, 2-5 year down cycle, voter revolt in 2012

5

Dare I boil what you said even further, if in my simple mind I understand…

It’s part of the “no one fails” mentality that has been developing for years, in addition to the items you pointed to. Things aren’t fair in real life, and when you try to even the field and allow those who can’t really sustain the dream by subsidising their dream or making it unrealistically easy, it’s doomed to failure.

I can’t wait till Thursday to hear how people who couldn’t afford their mortgages in the first place are going to be saved.

6

It’s part of the “no one fails” mentality that has been developing for years

No one fails, No one suffers.

These two things bring about the ideology of “Instant gratification”. Corporations don’t think in terms of Centuries of decades, but day to day and quarterly profit. Politicians don’t link in terms of grand children and great grandchildren but the next election cycle.

They all know that they “Can’t fail” because someone somewhere won’t allow that and it will be “Fixed” by adding another bandaid, so planning and long term success is no longer part of the equation.

Eventually however the bandaids no longer hold together and structure collapses.

I think your one line boils it down very well. It’s the greed of capitalism, without the consequences of capitalism which is failure and correction.

~Matt

7

This is a softball…
I don’t think so. The answers so far have talked in big general terms about how it boils down to our character flaws. So far I agree with most of them except yours as the issue predates the election far more than it post dates it.

My questions appear deceptively simply, but I don’t think they are being asked by the right people or answered. Let me rephrase the last one, What does the solved problem look like (i.e. unemployment = A, bankruptcies=B, GDP=C etc…) not what is the method to get us there. The market going down is not necessarily in and of itself a problem - thats what markets do - its the negative consequences if the market stays down for say a decade.

If you lost value in your 401k because you were essentially gambling (I know I did) then that is a problem that you may recover from. If you loose your job and cannot get another one for several years that is a more critical problem. So multiple those two problems by an entire nation and you get to the point of at least considering government intervention to reduce the problem. Its possible that the government can speed up the cycle to minimize unemployment, its not possible that the government can change the habits of a nation of people living beyond their means.

I just see tons of folks in politics and business talking about the best method to solve the problem without ever settling on what it is they think should be solved.

8

**So far I agree with most of them except yours as the issue predates the election far more than it post dates it. **

Pedalsaurus_Tex and a few others blame everything on Obama so you are not going to get far arguing with them about the free market.

9

Its possible that the government can speed up the cycle to minimize unemployment, its not possible that the government can change the habits of a nation of people living beyond their means.

I would rephrase this a bit differently

Its possible that the government can speed up the cycle to minimize unemployment IN THE SHORT TERM, its not possible that the government can change the habits of a nation of people living beyond their means.

IOW I find that most of what the government is and will do is meant to seek short term relief rather than long term gain. In short what the government often does today often times create a larger mess in the long term, I think this is exactly the case with the current scenario.

If the current actions have any meaningful impact, that’s a big IF, it will be simply another bandaid that will lead to a likely future correction that is larger and more catastrophic.

~Matt

10

…what the government often does today often times create a larger mess in the long term…

I agree, although the same can easily be said for banks and financial institutions. There does seem to be a need for funded enforcement to prevent the kind of fraud in the mortage and banking industries that has played a critical role in our current crisis, and that’s one area where doing nothing does not seem to be the best option.

11

If you loose your job and cannot get another one for several years that is a more critical problem.

The trick is determining how much production will drop before we hit an equalibrium point. IMO we have a long way to go yet.

In our society production and consumption go hand in hand. For the last 10 years or so consumption has been propped up via excalating credit. Bush et al required this in order further his neocon plans. If we had been in serious recession after the dotcom bust (which would naturally occur) then he would have stood little chance of invading Iraq or getting re-elected.

So… politics. An escalating debt level makes things look better than they really are. But when the debt maxes out, the shit hits the fan. Instead of a typical recession cycle we now have one “squared” merely from the debt bubble. Add in a few trillion in financial fraud. Then consider that the US has lost the edge in technological innovation that has been our main source of wealth.

So like Matt said… maybe we will be living in caves.

Its possible that the government can speed up the cycle to minimize unemployment, its not possible that the government can change the habits of a nation of people living beyond their means.

The habit of living beyond their means will surely go away when it is no longer possible. That is already happening now. If your lifestyle requires credit then you have to cut back. Reduced consumption leads to reduce production, layoffs, foreclosures, bankruptsy, etc.

I just see tons of folks in politics and business talking about the best method to solve the problem without ever settling on what it is they think should be solved.

I haven’t seen any long term “solutions” at all. They seem to be focused on the quick fix just to keep sudden disaster from occuring. Ultimately the only sound economy will be one based on efficiency and technological innovation… else we will continue the long slide that started 30-40 years ago.

12

I agree, although the same can easily be said for banks and financial institutions.

Except what we see as “Financial institutions” are largely government influenced. I seriously doubt we would have seen a similar meltdown if we were closer to a “Free market” than we are.

Who in their right mind would sell a loan to someone that pretty much had no chance of paying it back, and then who in their right mind would buy a whole bunch of them? The only thing that allowed that to happen was government intervention and “Backing”, real or implied.

People don’t treat their own money that way.

**that’s one area where doing nothing does not seem to be the best option. **

I’m not saying do nothing, I’m saying undoing a lot of things is doing something. What we are currently doing is not undoing anything but piling on more. Bailing water out of the sinking ship rather than patching the holes.

~Matt

13

I agree with a lot of what you and Matt have said, but I think the enforcement mechanism we need already exists. If I am a bank and I make loans to people that are unable to repay them, then I lose money. There is your enforcement. Unfortunately I believe that the risk of losing money is taken away through the implied / direct government backstop that allows banks to make bad loans knowing that the government will bail them out.

Take away the government backstop and the enforcement mechanism will work just fine.

14

I asked this on another thread and got minimal replies.

What does economic collapse look like? What measures are you (and your family) taking to avoid being caught up in the mess? lots of doom and gloomers but not many people talking about taking any proactive action.

15

Funny you mention that…Just this morning, actually for a while, I’ve been reading that people are complaining that the banks aren’t lending. Actually, I think they have reverted to “real” qualification practices, like a job, enough income to support the loan repayment terms, good credit history. Gee, go figure. Now people are upset.

16

Funny you mention that…Just this morning, actually for a while, I’ve been reading that people are complaining that the banks aren’t lending. Actually, I think they have reverted to “real” qualification practices, like a job, enough income to support the loan repayment terms, good credit history. Gee, go figure. Now people are upset.

I had been hearing this to - that it was really hard to get a loan. We had been thinking of getting a Line of Credit( more for rainy day purposes than anything else - we don’t shop on credit) anyway, so I went to our bank and in about 20 minutes I had a line of credit set up with a ridiculously low interest rate. Now, they know that I have a job. They know that I have a house and a mortgage with this bank. They know my banking and credit history because I have been banking at this same bank for 20 years. But it was *that *easy. Now this is all in Canada, and I know that overall it is much harder to get a loan here than in the U.S. and I have heard that this is something that given the current goings on in the U.S. has been really helpful for Canada and Canadians - basically the only people that get loans up here, are people and businesses the fully qualify under some fairly stringent criteria.

17

“What does economic collapse look like?” Good question…I have to look at the news, mostly on-line and the non-mainstream TV to see/hear about it. On the weekends it’s still hard to park at the mall or the big name outlet store centers. Still have to wait to get into restaurants Thur-Sunday nights. My Step Daughter is making more money in tips at the local chain restaurant than she ever has. I take guitar lessons at a studio where the teacher also owns the bar upstairs…Their business hasn’t skipped a beat. My guess is that in my area, SE PA/S Jersey, I’m not seeing the major effects of the slowdown, other than a tanking 401K. My guess is it’s somewhat compartmentalized.

“What measures are you (and your family) taking to avoid being caught up in the mess?” Having said all that above, I’ve paid everything off except my mortgage and a small Motorcycle loan. I’ve cut way, way back on spending and upped my direct deposit savings to an on-line savings account. My wife is a nurse and is in little danger, so we have that and my Navy Reserve pay to fall back on in case I would lose my job. Which, is unlikely as I can take a TDY assignment with my company till anything blew over, which is a last resort for me. At any rate, I’ve started making contacts with people in the industry I left about 8 years ago and have begun to get back up to speed on the latest technologies in that industry, just in case.

“lots of doom and gloomers but not many people talking about taking any proactive action.” I have nothing here except that I think some of what we are being fed is a line of crap to stir up emotion to push political agendas. I don’t trust lawyers, generally, and trust lawyer/politicians even less.

18

I don’t know how people got those bad mortgages so easy…Just don’t understand. When I refinanced in early 2008, I all but had to give a DNA and Stool sample to complete the process. I’ve been through the mortgage process several times and each time it was extremely painful, with the intense qualification process, even with a great credit score.

I guess I live by the old saying, if it looks too good to be true, it must be! Keeps me out of trouble. Kinda like the whole Bernie Maddoff fiasco. No one ever questioned him when they were making all that money???

19

When I refinanced in early 2008, I all but had to give a DNA and Stool sample to complete the process.

Many banks still functioned on the principal that they wanted you to be able to pay the loan back. Others however were deep in a scheme whereby they sold the loans as “low risk” mortgage back securities. In other words they dumped it off to someone else who sold it too investors. Since the original lender wasn’t going to be left holding the bag, they quit caring if the borrower could pay it back… in fact some of them encouraged borrowers to lie on their applications.

Basically it was an orgie of BS… with everyone hoping that the poor slobs who were buying these MBSs and thinking they were safe investments would be left holding the bag.

20

So you’re saying the government forced these companies to make these loans, then forced them to repackage them into securities, to buy them from other companies, slice them and dice them multiple times while continuing to sell them, and all the while do so with next to no business standards or logical financial risk management practices.

FAIL :wink:

That dog won’t hunt.