Economy

[LiL stumppy]

Forgive me, I am a total n00b when it comes to this stuff. I quit my job a few months ago (bad idea) and now can't find part time work anywhere. I see everywhere people are taking pay cuts or are getting let go because of the economy. What make an economy bad? I always thought that if people were spending money then everything is good. So why can't people spend more money? Is it the fact that food and everything is getting more expensive?

Please no politics involved.

[Bugeater]

Originally Posted by Skip Towne

Are they even making carburetors any more? Everything is injected now.

As long as he's interested in the lucrative field of lawn mower repair, he's golden.

[KcMizzou]

Originally Posted by Skip Towne

Are they even making carburetors any more? Everything is injected now.

You can't even buy a carb from GM anymore. They're all discontinued. You have to take a number off the body and call an aftermarket place like O'Rielley's.

[Amnorix]

Originally Posted by Mark M

First of all, it'd be nice if people posting here would share their experience in this area -- blaming the issue simply on housing or the media does nothing but display a stunning lack of knowledge of the larger issues.

Best post on here. Many in this thread contain errors, oversights or are just garbage.

Keep in mind something else that I haven't seen stated yet -- capitalist economies are (or at least historically have been) cyclical in nature. We have yet to figure out a way to remove the cyclicality of the economy, even though we had (we thought) developed systems to reduce the duration and depth of economic downturns.

[Amnorix]

Originally Posted by PhillyChiefFan

I really hope it ushers in a new era of responsibility, but I doubt it will. The American Public have a very short memory for lessons such as these.

First, it's everyone, not just Americans. Second, it's fundamental human nature.

[Amnorix]

Originally Posted by KC Jones

Excellent post

However I would add a 4.5 in there...

4.5 These securitized debts (repackaged into investments that could be sold), were then leveraged into credit derivative swaps. I seriously don't know what the **** that really means despite reading about it, but as far as I can tell it's a side bet placed on whether or not the original debts will be paid. However we allowed side bets worth far more than the initial debt. So maybe you had 50 billion in actual mortgage debt out there, but with 500 billion in side bets on whether or not it would be paid. AND these finance wizards BORROWED to make these side bets.

mmm....securitizations are perfectly valid lending arrangements. Swaps are generally designed to limit risk, not increase exposure, but maybe there is a nuance there that goes beyond what I know.

Securitizations packages are in their simplest form not all that complicated.

Let's say that you start a hardware store. It grows into something big -- a chain. You want to offer your customers a credit card because they're profitable for you to run. Here's the problem -- your customers are buying your stuff and walking off with the goods, but all they have given you is a promise to pay in return. And the promise is that they will pay not tomorrow, but within 30-60 days, on average.

So a guy buys a hammer and pays you in 60 days. Fine. But now you're down a hammer, and of course Stanley or whoever made the hammer expected to be (and was) paid within 30 days of selling you the hammer 6 months ago. So first you had to carry it on your shelves for 5 more months without getting paid for it, and now you hav eto wait up to another 60 days before you're going to get paid for it.

And -- oh yeah -- now you need to get another hammer from Stanley to put on the shelf to replace the one you sold, and you'll need to pay for THAT one within 30 days.

Multiply that by thousnads of hammers and stuff, and you've got a serious problem -- not enough money to cover all these costs while you're waiting to get paid for the stuff you've already sold. You know (and are correct) that you will make a profit on your credit cards if only you can afford all this.

So instead of waiting for 60 days to get paid, you get a loan to help you buy the new hammer and whatever else need while waiting to get paid. So what do you do? You collateralize the payment stream of all the credit card payments that are owed to you and take a loan against it all.

So you're owed $100K by all your credit card customers. You need money to restock your shelves. You borrow it. But not everyone has the same risk tolerance, and not every dollar owed is able to be borrwed at the same rate.

Using random number (I don't know the actuals), Bank A, which doesn't like risk, says "I will loan you $20,000 against the first $20,000 paid to you by your credit card customers. Because I get paid first, it's a low rate loan. I will loan you the money at 5%".

Insurance Company B says "well, I don't like risk much, but I can handle a little. I will loan $30,000 and be second in line behind Bank A. The loan will cost you 6%."

(total of $100K in receivables now has $50K of loans against it)

Insurance Company C says "risk isn't bad, and my portfolio is too boring anyway. I'll be third in line, for $20K, but the rate is going to be 7%."

Weird Lending Company D says "risk is great, but I learned all I know from Louie the Legbreaker. I'll loan you $20K, but the rate is 9.5%."

The last $10K -- nobody will loan against it. It's yours and yours alone. So now you can take loans of up to $90K to restock your shelves, pay a carrying cost and you're good. The late payments and other charges on the credit cards should about cover or exceed the interest rate payments you need to pay to your 4 lenders.

3-5% of your borrowers will default, so that money is lost, but overall, it's all good and profitable, and instead of paying 5% or whatever of your sales to Visa or MasterCard, you can issue your own credit cards and keep some of those profits.

[Mr. Flopnuts]

Originally Posted by LiL stumppy

I'm not being a smart ass, just saying sorry for not clarifying what I meant.


We have been discussing this topic a lot and it amazes me how everyone has some way to fix the economy, not two people had the same idea. It was, new government, spend money, don't spend money. I never really followed politics or anything like that so I had no idea what was going on and didn't really believe this "recession" we were going through until the past few months where I have looked for a job and can absolutely not find one. Seems here a lot of people have different opinions as well on how to fix this problem. I am just curious, that's all.

Time and self discipline. People need to pay their bills. When that happens, banks will make more money and be happy again. Once they're happy they'll start lending us money again. If that sounds somewhat like slavery, IMO it is. But without any kind of political posturing there is no other solution.

[cdcox]

Originally Posted by Mark M

and the "free market" once again proved that it does not self-correct -- it takes as much as it can, ensuring to privatize the profits and socialize the losses.

Don't get me wrong -- free market theory is wonderful. But unfettered free market capitalism in reality has been proven to do major damage. We really need a middle ground -- free market ideas and spirit, but with enough guidance to avoid exploitation, yet at the same time also not horrifically constrictive.

Again, that's my understanding of it based on my professional experience. Take it for what it's worth ...

MM
~~

I disagree that the free market does not self correct. It does, but in a brutal way. The impending collapse of the financial system was the free market correction. The impending collapse of the US auto industry was the free market correction. So far we are choosing government intervention instead of allowing the free market correction to take place. Largely because the free market corrections are too painful to bear. I agree with you that we need a middle ground. One problem we have now is that the same people who want free markets on the up swing (Wall Street and Detroit) want government intervention on the down swing. Then the have the audacity to want free reign to do what they want with the bailout money with no accountability.

[Calcountry]

Originally Posted by Rain Man

Maybe in a bad economy people eat pets.

No, but maybe they talk to them more. lmao.

[Calcountry]

Originally Posted by LiL stumppy

I am sorry, I didn't want it to turn into a political war where everyone said it was so and so's fault and only so and so could fix it.

First, one must consider the concept of micro vs macro economics.

In College, each is an entire semesters work and a differenet textbook to read.

Micro, is your own self interest, first person point of view looking out at the world.

Macro, is an aggregate look at the combination of everyones economics. IOW, the sum economic activity in the whole country.

Currently, our economy is somewhere near 10 trillion dollars a year in total gross domestic product(hey, there is a term, what does it mean?)

We are a free country full of self serving individuals, it is about as likely, that "someone" can "fix" this thing as it is for Al Gore to take a fart and reduce global warming, er, climate change.

[Calcountry]

Originally Posted by Sure-Oz

Hang in there dude, just be glad you are in HS and you aren't like alot of people who are struggling.

No doubt, even a protracted stint at the Junior college is awesome during a downturn. Hopefully, the economy turns about the time you are graduating so you can enter the work force on the beginning of a new up leg in the next business cycle(OMG, there is another term to look up)

[Stewie]

We have a fiat money system. It works until it doesn't. No fiat money system has ever worked over time... EVER!!! They'll baffle you with bullshit, but in the end it's just ink on paper.

As for the derivatives mentioned in this thread we need to clarify "derivative." Simple derivatives are options, futures, swaps, etc., and have been around for years. Over-the-counter derivatives are a whole different ball game. OTC derivatives have infected the markets to the tune of $20 trillion and are the play of the day. It made lots of people lots of money, yet here we are bailing out those same people with tax dollars. I sure hope they enjoy there million dollar home(s) in the Hamptons because you, Joe Blow, are paying for their big, fat, and expensive stupidity. Ain't it GRAND!!!

[Calcountry]

Originally Posted by LiL stumppy

I'm not being a smart ass, just saying sorry for not clarifying what I meant.


We have been discussing this topic a lot and it amazes me how everyone has some way to fix the economy, not two people had the same idea. It was, new government, spend money, don't spend money. I never really followed politics or anything like that so I had no idea what was going on and didn't really believe this "recession" we were going through until the past few months where I have looked for a job and can absolutely not find one. Seems here a lot of people have different opinions as well on how to fix this problem. I am just curious, that's all.

Sometimes in econ, perception is everything.

If your prospective boss perceives the economy getting worse in the months ahead, he OR she alters their current behavior by putting off investments in plant or equipment, reducing their variable overhead of which labor costs is probably the most expensive component.

This in turn, leads to a self fullfilling prophecy of sorts, because you now, have no part time job, and are not able to take sweet little mary jane to the soda shop for a malt. The soda jerk is now out of a job because there aren't any janes and johnnys hanging out there, and so on.

Of course, the demand side people "create jobs" by taxing the rich, and taking that mofo's money and "employing" people to do things like rake leaves, and work as customer service at the US Mint and any number of other government jobs such as postal workers etc.

The reason this always becomes political, is due to the size of government in our economy. Government seeks to insert itself wherever it sees fit, as if it has the answers to where scarce resources OUGHT to be allocated to serve the greatest "common good". They do this by taxing rich mofos until they leave for Switzerland and take a vacation.

Then, the government plays Santa Claus and doles money out to its constituents. Yes, they tend to allocate it to the people that elected them and keep them elected, AKA Pork barrel spending, or more recently "earmarks".

[LiL stumppy]

That's what I always though, that it was a type of self fulfilling prophecy. We keep saying it's bad so people get go into freak-out mode, whether it's really bad or not.

[LiL stumppy]

Originally Posted by Sure-Oz

Hang in there dude, just be glad you are in HS and you aren't like alot of people who are struggling.

I am very glad I'm not struggling. We haven't been hit bad yet I guess (parents) but a lot of places in this area a closing down.

[chiefzilla1501]

If you look past politics, while there are disagreements on how to fix the problem, there is pretty much a consensus on how it started: a large part of this is the piece about the subprime mortgage crisis, in which investors were paying for houses they couldn't afford and ended up defaulting, which decimated a lot of mortgage-based investments. But the bigger problem is the emergence of a popular investment called a credit default swap.

Basically, when a bank loans out complex debt to an investor, there is a high risk of default in which the borrower can't pay the bank back. Credit default swaps are basically a form of insurance to protect against that. The problem is, that lenders grossly underestimated the payouts from default which have been rising every year and the market has been unregulated. Think of it as insurance that was not regulated. And so, lenders need to pay out a lot more money than they are capable of paying. Hence, why AIG was bailed out--because the government knew that if AIG defaulted on their payments on these swaps, it would lead to a downward spiral of economic failures.

Another easier explanation for the down economy is that costs are rising, which are squeezing margins. When a small business has to pay outlandish fuel prices, that makes it harder for them to pay more money to invest in things like workers or machines (which take workers to produce).

These are pretty non-political explanations for the downfall of the economy, coming from a pretty moderate person. The solution to the problem is probably a mixture of both letting the market correct itself and taking some corrective action to fix the problem. You'll see a lot of politics in these matters, but I think you'll see a TON of politicians reaching across the aisle because they know that there's too much at stake to be jockeying for political position.

Originally Posted by LiL stumppy

I'm not being a smart ass, just saying sorry for not clarifying what I meant.


We have been discussing this topic a lot and it amazes me how everyone has some way to fix the economy, not two people had the same idea. It was, new government, spend money, don't spend money. I never really followed politics or anything like that so I had no idea what was going on and didn't really believe this "recession" we were going through until the past few months where I have looked for a job and can absolutely not find one. Seems here a lot of people have different opinions as well on how to fix this problem. I am just curious, that's all.