Random Thoughts on the Economy

[EricBess]

I'm not an economic expert, but I've been thinking a lot about this recently and I wanted to run this by you guys and get some of your insight as well.

It seems that a "good economy" is characterized by people buying things. You hear words such as "Consumer confidence" and money seems to trade hands fairly regularly.

On the other hand, when the economy is slow, it is usually because there is some reason in general people don't want to spend money.

Government tries to regulate to some degree by controlling interest rates. When interest rates are high, people tend to save money because 1) they cannot afford to take out loans, and 2) they get a good return on their investment by saving. When interest rates are low, the opposite happens - not much return on savings and easy financing.

So why is it that interest rates are so low right now and yet the economy is largely believed to be horrible?

I have two theories (and one subtheory) -

Theory #1 - The economy isn't really as bad as it seems, but because prices for fuel and food have skyrocketed recently, people are having to redirect their spending on these items. In other words, we are spending as much as we always do, but it seems like we aren't because we aren't getting as much for our money.

Theory #2 - Consumer confidence has been taken for a loop on the housing market. Even though interest rates are low right now, people don't want to buy because they are afraid that they will become trapped.

Subtheory - We've had such good interest rates and it's been so easy to spend for so long that we have, as a country, overextended to the point where we can't spend anymore right now, even if we wanted to.

 

[DarthFerret]

One of the reasons that the economy is said to be suffering is the housing market. There were a lot of people that undertook sub-prime loans and variable rate loans, and they have been hit really hard. There are a ton of homes out there that are being foreclosed on everyday.

Fuel and food costs may have skyrocketed, however, I think that this is only part of the reduction in spending. People are starting to become a bit more educated about long-term investing, savings, 401K's, etc.... This leads towards a national trend in savings. The baby-boomers as a side item, were mainly spenders. They did not worry too much about saving for thier future or retierment. As a result, they rely a bit more heavily on social security. Most of the current working generations are starting to believe that social security will not be around when they retire and are starting to save back a bit more.

Keep in mind these are two small aspects, however I think they do affect the way the economy is viewed in current day terms.

 

[Mooseman]

It seems that a "good economy" is characterized by people buying things. You hear words such as "Consumer confidence" and money seems to trade hands fairly regularly.

I think you have this incorrect... a good economy is characterized by people being able to afford things, and that includes savings plans.

I believe that the "consumer" economy is a faulty and can not be sustained.....
Spending your way out of a recession is the height of arrogance, the economy has improved when savings goes up and that capital can be invested into expanding business (in our country), that produces jobs, which produces people attaining affordability.....


The energy costs have increased the costs of almost everything else.... this has caused consumers to redirect their spending dollars to compensate.... Less units are being sold, but those are being sold at a higher price.....

 

[Spiderman]

Building on Mooseman, along with the rising costs of fuel, food, and energy that are outpacing people incomes (they aren't rising every month or even day to keep in step with the trio ), the reason why we have low interest rates yet the economy is horrible is because the lenders have tightened up their qualification standards and/or are having trouble themselves (Bank of America is buying Countrywide, I believe). So even though there's low interest rates, less people are qualifying for them.

 

[Mooseman]

So even though there's low interest rates, less people are qualifying for them.

Also, there are less people that can afford loans, so there are less people applying for them....... Most of this are directed towards mortgages.

The sub-prime loan problems are another example of bad business practices and poor consumer intelligence.. Didn't the US have a very similar problem in the 80's..... bad real estate speculation, coupled with bad lending practices..... I seem to remember the US taxpayers bailing out the S&L's.......

 

[Spiderman]

I was only in my teens then so I wasn't paying attention to that back then

 

[Mooseman]

Silverado S&L..... something about their board.......

 

[DarthFerret]

I heard about the S & L scandal, but like Spidey, was in my teens and it did not concern me enough at the time to pay attention.

 

[Mooseman]

Those who are ignorant of history are fated to repeat it.....

I think it was about the same as this scandal.... deregulation of banking and investing led to risky speculating on real estate and when the balloon popped, many S&L's and banks were going under and the government bailed out some of them.......

 

[Mooseman]

http://en.wikipedia.org/wiki/Savings_and_Loan_crisis


In an effort to take advantage of the real estate boom (outstanding US mortgage loans: 1976 $700 billion; 1980 $1.2 trillion) and high interest rates of the late 1970s and early 1980s, many S&Ls lent far more money than was prudent, and to risky ventures which many S&Ls were not qualified to assess. L. William Seidman, former chairman of both the FDIC and the Resolution Trust Corporation, stated, "The banking problems of the '80s and '90s came primarily, but not exclusively, from unsound real estate lending."

 

[Mooseman]

Ok,
It looks like the same thing over again. A Bush bailing out financial institutions for mismanaging their investments....... AIG, Fannie Mae, Freddie Mac..... you tax dollars are going to prop up these companies...... This is a mess..... hopefully the next president won't be as dumb as this one..... and yes, he is an idiot, moron, dunce.....

 

[DarthFerret]

I am pretty sure it was not Bush bailing them out. It took the entire (Democratic Controlled) Congress to do that, am I right?

 

[BigBlue]

S&L problems started w/ Real Estate... What happened was rates started to rise and so their spread started shrinking (The gap between interest paid and interest earned is the spread). To attempt to make up for that gap, they started making risky investments with their assets... and got burned...

Todays Real Estate problems are based on this boom we had... The fed lowered the rate so low, that Prime was at it's lowest point in decades... This allowed people who could not really afford to buy a house, buy one... because they got them with rates tied to Prime that started out low... If you've never had an ARM (Adjustable Rate Mortgage), every year they set the new rate - and your payment is ajusted to make up the difference... people at the lowest ends couldn't afford the higher payments - somehow they just thought the rates would always be low... so they'd foreclose... foreclosures en masse are bad for a market, since they increase supply inordinately and drop values... as values drop it affects everyone... And this boom we had, based largely on people buying homes and investing every penny of equity in remodeling them (so everyone would live in their mansion) ended... Equity evaporates, No more spending on home improvements. Generally good paying construction jobs evaporate... it all snowballs into what we have today...

Some economists are saying this is partly due to people investing too much in their 401K... Why is this? Because we have transitioned from a manufacturing economy with solid union jobs that have company provided retirements to a service oriented economy, and most people do not have those retirements and pensions any longer... so, they have to create their own retirement funds w/ 401K. Also, everyone "knows" that Social Security is going to fail... once they started spending that money in the 60's instead of keeping it seperate they planted the seeds for it's doom. The baby boomers will suck up all the resources of the rest of us when they retire. Those of us in the smallest generation, Generation X, will probably be hit the hardest by this, because we'll be the first to not have Social Security - and have put the most of our paychecks into it for no return.

As far as Bush/Government giving money to bail out the financials... It is an effort to at least stabalize Wall Street (where a lot of our 401K money is). My concern is the random economist out there who start talking about running on banks... banks and credit unions are for the most part sound... But, they are a lot like the Bailey Savings & Loan of "Wonderful Life", the money is invested in loans, and isn't liquid... runs on them can quickly turn a sound institution sour as it eats up their liquidity and forces short term sacrifices to try to get more liquidity.

I'm not an economist... but, I am a Credit Union employee who's gone through management school and understands how the system works. It included several classes on Economics tought by economists... One of which was an examiner for S&L's during the crisis and related to us the hows and why's of it.

 

[Spiderman]

Generation X, will probably be hit the hardest by this, because we'll be the first to not have Social Security

This is false, there will be Social Security, it's just that it won't be able to pay at the level it pays right now (something like down to 75% of current payments).

This isn't going to happen until around 2042 (projected) and I can guarantee that something will happen until then. Either the retirement age is going to get increased, less benefits (so the 75% ends up equaling 100% then), more money taken out or shifted into the funds, etc. The longer it's put off the more painful it's going to be, but something's gonna happen.

 

[Mooseman]

I am pretty sure it was not Bush bailing them out. It took the entire (Democratic Controlled) Congress to do that, am I right?

No, you are not.... it was the Federal Reserve , not the US congress......

 

[BigBlue]

DF - do you think 75% of what they pay today will be enough to support a retired family? Sure, they say there will be "something"... my point is, the something won't be equal to what it is today... and eventually it will fail, as will medicare... so, all these dollars you and I spend every paycheck which we can't claim as "taxes" aren't going to come back to us the way we've been promised... Because the government started spending that money - and isn't going to afford to pay it back... a huge portion of the federal deficit is owed to Social Security - the taxpayers...

So, that's why I give 6% (which is matched by my employer thankfully) of every paycheck to my 401K - which is falling like a rock due to the events on Wall Street. 30 years ago, good paying jobs included pensions... so you didn't have to build it yourself. That money (which should be spent today) is taken out of the economy and simply poured into Wall Street until I retire when it will be spent...

At some point, this service economy will collapse... we need to get back into producing things in this country, you can't continually send money out of the US as we are today...

 

[Spiderman]

That's actually to me... and Social Security was never intended to be the sole income for a retired family. You can't live on SS now with current levels of benefits - you should *always* have a retirement plan.

 

[BigBlue]

I don't know about you... but the statements I get from the SSA every couple years which show how much I'm on track to earn... would be enough to live on if they are actually there... Assuming I work until I'm 70ish... It is around the same levels as I'm paid today, and if I own my home then and only need to provide food etc, it's easilly enough... Now, if you want to live the lavish retirement that we envision today - with trips, RV's, being a snowbird, etc... then no, it isn't enough...

I think that's a huge part of the problem we have today... we've come to believe it's ok to live beyond our means... And I'll be honest, I'm right there with the rest of the US in this regard... I don't sacrifice much... I'm trying to be less a consumer of garbage - for many reasons including the savings... but once in a while, that DVD just seems like I "Need" it... Just like snack foods... No nutritional value, but they make us feel good, and are relatively cheap by themselves (add up how much you spend over a year though). Those are not only taking money out of our budget, they are going straight to the waistline... and eventually if you aren't careful lead to healthcare expenses down the road... I know the answer is to simply have the discipline to not buy Ice Cream (for example)... But it's hard to change those habits - maybe they add Nicotine to them...

 

[Spiderman]

Until your 70-ish... which is the catch, because no one expects to retire at 70. They want to retire ASAP, whether at 62 1/2 and take a cut in benefits or at 65 or 67 when they can take full benefits.

And mine isn't enough to live on right now, although I have all the expenses that I wouldn't have at 67. But then, I could have different expenses - medication, for one.

But what I'm saying is that SS was never billed as the *sole* retirement income.

 

[Mooseman]

At some point, this service economy will collapse... we need to get back into producing things in this country, you can't continually send money out of the US as we are today...

Amen, Brother.... Why aren't either of these candidates talking about bringing manufacturing back to the US? I know that the unions and corporate greed, along with over regulation by the EPA, have lead to the decline of of manufacturing base.... so, who has an answer? Who even knows that it needs an answer.....

Actually a big portion of retirement money is spent on health care.... If there were such a thing as affordable health care, it would go a long way to solving some of the retirement problems. That health care should represent your ability to pay for it too, not the same for everyone regardless of resources.... if you sat on your oink driving a bus for 30yrs, eating burgers and pizza, does not entitle you to expensive medical care when that life style comes back to bite you...... Whatever happened to free clinics, where poor people could get an initial diagnosis or simple treatment?