Would you like to know more about:

How your credit card debt compares to the national average?learn more

The Economic Crash of 2008

2008: The Year from Hades:

This past year has been an absolute economic disaster in every imaginable sense of the word. There were bank closings. Some long lived financial institutions other than banks failed. Small businesses are still failing, and we haven't heard the last of the home mortgage fiasco. The stock market lost 49% of its value leaving a lot of retired people wondering what they're going to do for funding in the next few years. Now the government is going to spend a huge amount of our tax money (some of which will be repaid) in an effort to bail out some of the major failures and right the economic ship in this country.

What Happened??

How did we get ourselves in this situation? And, there's no doubt that as Americans we did indeed do it to ourselves. There was no nefarious plot from outside the country that brought it about. There are lots of reasons underlying our present predicament most of which are probably not known or knowable for you and me, but some things are clear; some of them far beyond our individual control, but some very much within our ability to manage individually.

• We have had an unprecedented 26 years of increasing prosperity in America. There's nothing wrong with that, is there? No. So far, so good. However, in my view, the long prosperity led American to have inflated - if not totally unrealistic - expectations. We came to think it (increasing prosperity) would always be true. Salaries would continue to climb. We would be able to afford bigger and bigger houses and more expensive cars. The stock market would hic-up from time to time, but it too would continue to climb. We didn't think we had to save. We became accustomed to increasing levels of family (and national) debt. We forgot about the law of gravity that tells us, "What goes up must (eventually) come down."
  
  So, we over extended in nearly every way possible, didn't prepare for financial emergencies, and abandoned plain old common sense.


• Greed became monumental and increasingly so. Hedge fund managers found a gold mine in paying themselves 2% of investor money (not too far afield from what most managers charge) but also charging 20% of any profits as well. To this point everything is fine. Then, to increase their take, they over-leveraged (borrowed too much money from banks) which worked great for everybody as long as the market kept rising - but it didn't. When it fell, many of the hedge fund managers had leveraged themselves right out of business and lost billions of their investor dollars. Corporation executive certainly weren't immune to greed either. If you're the CEO of Exxon-Mobile, how do you justify giving yourself a six hundred million dollar retirement package?


• Bankers ignored due diligence and abdicated their responsibility. Bankers have been loaning money and assessing the risk thereof for centuries. Why would they see fit to loan several hundred thousand dollars each to people for housing when they knew the borrower didn't have the resources to pay the money back? Answer: for an additional one percent, knowing they didn't have to be responsible to collect the money owed because they could package many loans (called derivatives, which literally no one understands) and sell those.


• Then there's the housing bubble. Bankers making goofy loans to people who couldn't afford them led to a lot of activity in the housing markets which led to skyrocketing prices which ballooned into a bubble that burst and continues to burst. I don't know the precise number, but over a trillion (that's 1,000,000,000,000, which is 100,000 million) dollars of inflated value disappeared. Both the bankers and the borrowers are responsible for their collective poor decision making.


• In the process, the stock market lost 49% of its value, hammering millions of individual investors.

All the above isn't just bad, it's really bad, and it will be a number of years before the economy recovers to previous levels.

The Good News:

So the economy is really bad right now, but is what is happening totally bad? Are there some positives hidden in there somewhere? Yes there are. A good metaphor for the situation is pouring a glass of beer. When you first pour, what you get is a lot of froth and some meaningful liquid. With time the froth decreases to a nice "head" and the meaningful liquid level increases. In the last year-the last few years actually-there has been a lot of froth in the economy and some of it will reduce to meaningful economic activity. So, let's look at some of the positives that will come from this disaster.

• Individual Americans will become more realistic in their expectations. They will back away a bit from the perception, "I deserve to have what I want now because I'm entitled." They will likely save more for emergencies and for their future goals and will be less likely to overburden themselves with credit card and other kinds of debt. They (we) will remember something our parent knew in their bones; you have to work for what you get and then use common sense to manage the outcome of your work.


• The way bankers set about making loans will change in response to governmental regulations if for no other reason. They will get back to the amazing notion that people need to qualify for loans to assure the borrowers will be able to repay the money.


• Corporations will probably rein-in executive pay and bonuses and use the savings to build the company and reward shareholders. Maybe this idea is just a fervent hope on my part when CEOs have a propensity to load their Boards with buddies who will pretty much approve what the CEO wants.


• Quite possibly some manufacturing will return to the U.S. from overseas and create jobs in this country. That may be a pipe dream too, but I don't think so.


• Unions will need to back off and moderate some of their demands so the company members work for can become profitable and they can keep their jobs.


• Prices for virtually everything are coming down. There are bargains everywhere. Cash is King.


• If you're an investor and are lucky enough and wise enough to have some kingly cash, you can buy stock is solid companies now and be assured that in a few years you will double your money.

The Big Psychological and Intellectual Mistake:

I think there's a fallacy that develops in perception and thought for people in times of sustained prosperity, and I believe centuries of history will bear this out. That is the notion that, "things are different now." Well, things are never different at the core, only on the surface.

You don't loan money to people who can't pay it back. High levels of debt are ruinous for individuals, families, small businesses, and large corporations. Saving is a good. Nobody is entitled. Greed is not a good thing. Instant gratification of all wants and wishes is not a good thing. It is wise to prepare for emergencies

These are things our parents and grandparents knew and lived by. We can do the same.

arley