News Day Tuesday: Oy…The Economy. Pass me the aspirin.

(cartoon by Paul Hoppe – click on cartoon for more readable version)

By now, most of us have heard about the turmoil gripping many of the world’s economies. Governments left and right have been stepping in with multi-billion dollar packages to help prevent an economic apocalypse. The U.S. Congress approved a $700 billion bailout several weeks ago, and most recently, China unveiled a $586 billion stimulus plan. The sheer size of these numbers illustrates how gigantic the problem is, and as is typically the case with gigantic problems, a lot of people end up getting hurt – including young people.

Some teenagers might experience these economic aftershocks as hearing the word “No” more often from their parents when it comes to purchases. Other teens are cutting back on their own spending – eating out less, buying fewer clothes, etc. Still others are having a tougher time finding part-time jobs. And for many high school seniors, the upcoming months will be more difficult as they struggle with decisions about college and how to pay for it.

So what has been your experience so far? Have any of you been affected by the economic downturn?

And just to mix it up a little…for any of you out there interested in economics and economic policy…what do you think of the debate about government regulation versus free market capitalism? Some are arguing that the current disaster is proof that the free market doesn’t work – that when you give it free reign, it will fall victim to greed and corruption, and when the “invisible hand” purges the market of these negative excesses, that the people who are hit hardest are the people who are least able to weather the storm – in other words, the middle-class, the working class, and the poor. On the other hand, others argue that regulation is the real cause of the economic crisis. In the U.S., critics argue that if the government hadn’t interfered by exerting pressure to increase home-ownership among lower-income people, then the whole subprime mortgage/housing bubble mess wouldn’t have happened in the first place because people who couldn’t afford to pay for houses wouldn’t have been approved for loans to pay for those houses. Then others counterargue that the blame doesn’t lie with these home-ownership programs at all, but with the investment firms and credit rating agencies that made these mortgages worth more than they were, and the lenders who exhibited predatory behavior by targeting people with lower credit ratings and/or who didn’t fully undertand the terms of the loans. But then others argue that the people who applied for those mortgages should’ve known better than to agree to pay for something that they couldn’t handle – just because the banks approved the loans didn’t mean the borrowers had to sign the contracts.

Whew! That’s a lot of back-and-forth. So what do you think? What should the balance be when it comes to government regulation and the free market?

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15 Responses to “News Day Tuesday: Oy…The Economy. Pass me the aspirin.”

  1. O.T Says:

    I don’t know much on this subjest. I do know how hard it is to find a job though. I’m not going to college for a couple reasons. I don’t have the money and I don’t know what I want to do, which makes it very hard to get anywhere in life.

    I have tried to get jobs, but it’s SO hard. I haven’t been able to get any and it’s like what do I do. I need to have a job. I need to pay for things. Everything is so expensive. So that’s what it’s like for me. Also some places wouldn’t hire me because of the position I applied for. They’re very sexist. Which I don’t think is fair.

  2. MarilyneL Says:

    Here in Quebec and Canada, we are very influenced by the American economy. Back in 1929, when Wall Street collapsed, we felt it too. So now, the word “recession” is more and more used and heard in everyone’s conversation. It kinda scary. Some specialists say that we must expect a imminent crash, while some others pretend that we won’t be in a as bad position as the US are, because “our government didn’t handle it the same way, it prevented it and because are financial companies are not as ” easy lenders”….” I guess we’ll have to see. What is also tricky is that in order to restart the economy, money has to spent. Just look at our post-war history. When everything needs to be rebuilt, money is spent, jobs are created, so people restart buying things, it’s a vicious circle… I don’t really care if big shot companies lose profit, however, seeing a student not being able to go to college because of the sudent crisis, or a family with parents that work 2-3 jobs to get at the end of the month is frustrating. Let’s hope things’ll get better in the next weeks.

  3. taylor nikole Says:

    ughh the economy sucks… there is unnecessary suffering…
    somehow especially the US needs to get back up on their feet and change.. and improve… everyone saw it coming
    nuff said ๐Ÿ™‚

  4. nicole Says:

    I just lost my job…yep the company just went banckrupt so its not easy because it’s not my fault it’s unfair I lost my job because some people made wrong financial decisions..so I am trying my best to find another job but being 25 right now it’s tough…all my salary is to pay rent and the bills…I try to keep a bonus for each month one month its for shoes the other is for the hairdresser and so on and so on…I really hope things get better
    love to all GBD members and can’ t wait to see KK in Smallville again!!!!I miss seing her so much

  5. Stephen K Says:

    Kathy,
    What is creditworthy. From banking 101, 20% down payment, verified income and good credit history.

    To increase home ownership among lower-income people the government forced banks to violate these requirements, to give credit to the un-creditworthy. Obviously these loans were unmarketable so a lot of financial manipulation went on to resell them. Freddie and Fannie, two GSE’s, were at the forefront of this effort. This is the root of the problem. The Federal Reserve pumped in lots of excess cheap credit which helped the housing bubble expand.

    But if you have suspended the rules for some (uncreditworthy) borrowers, then your borrowers with good credit also have to be eligible. This expanded the problem to where it is today. By some estimates 50% of mortgages are unstable.

    One guy on my block got a 0% down liar loan and has been struggling for a year, now is ready to just walk away from the house but hoping for a government bailout. Next door neighbor took out a home equity loan, no income verification, using a ‘friendly’ appraiser. He is gone, foreclosed on. I sold (because I lost my income). The dot com meltdown sent jobs in my field to China. So I’m looking at drastically reduced (future) income.

    But don’t worry the bill for all this has been shifted to the children (debt) and the youth vote was out in force, legitimizing the government.

    I don’t think the issue is regulation vs free market. Any market needs some regulation. The issue is government interference in the market, government distortion of the market, the socialism and corporatism. Here lofty social justice goals created a situation that has severely damaged the economy. Whatever the ‘solution’ is it will be very unfair to the responsible borrowers.
    Steve

  6. Ashley Says:

    I’ve recently found it harder to find a part time job because so many people aren’t financially able to hire. It hurts not only me but them too, you know being nineteen and mommie and daddie aren’t gonna help buy you things and pay your bills it’s you’re job now. It’s really hard. But I think the U.S. as we are we are now seeing everything isn’t gonna be handed to us. So we will be finding it hard but im blessed to have great friends and family to help me out even when they can’t. To balance it, the government should in some way set a limit for everyone in the U.S, spending limit, even gas regulating can be done. Gas can take a lot of money too. I know it’s like 20 bucks to fill my tank but i have an economy car so…but yeah things like that would even help. We are definitely in a pickle here definitely. I agree with Taylor nikole it is suffering big time but we can change that just by changing the spending and stuff.

  7. Co Says:

    *sigh* The Economy SUCKS!!!
    I can’t find a job because I didn’t graduate high school, I didn’t graduate high school because I couldn’t afford gas to go everyday, I couldn’t afford gas because I had no job, neither did my mother.

    I HAVE to move in with my father because where he lives I can actually find a crappy job. Meaning im leaving all my family, and my friends just so I can make 10 bucks a day.

    It’s just so STRESSFUL!

  8. Allie Says:

    Yeah, definitely feeling the effects.
    My parents are being hit especially hard. Their salaries consist of people basically donating money to them, not an easy thing when there ISN’T an economic crisis, and so with everybody else struggling, they’re just not doing so great. =(

    Also, in regards to Free Market vs Gov’t Regulation, it’s a fine line. I think that Government regulation can get out of control very easily, but at the same time, when you simply have Free Market, sometimes there are things that need to be regulated, otherwise THEY in turn get out of control. So yeah, like I said, it’s a fine line….so fine a line I’m not even sure if a happy medium between the two would ever exist/work. There will always be problems.

  9. Emma-Lu Says:

    @Stephen K

    Thanks for participating in the discussion!
    I want to make a comment about your last point. A friend of mine pointed out in a discussion similar to this one that Social justice goals are not to blame for the current economic problems, it’s the fault of greedy Banks. Don’t you think?

  10. dom Says:

    The crisis, while here in France we seem less affected with the subprimes ,the real economy slowing down.
    the thing that bug me,is that all the governments have found money for banks
    (itโ€™s ok I think if they do not found money, the situation would be worse),
    but before there are no money for social, – how many scholarship student could we do with the money that the politicians suddenly have found ?),
    it is for me the real sign of a malfunction of the system.

    @ Stephen – I do not think this is an issue of social justice but a too big appetite for money itself …

    dom

  11. Stephen K Says:

    Thanks Emma-Lu,
    The Community Reinvestment Act (CRA) from 1977 is where this started. Designed to ‘encourage’ banks to lend to all borrowers. This was expanded/enhanced by both Clinton and Bush. (bipartisan support)

    The bottom line is that you are extending credit, by law, to people who are not creditworthy. When you make it policy to ignore credit histories and income as criteria you are creating junk mortgages. Then the lax standards are extended to all borrowers. By far middle class borrowers are the largest group now in trouble.

    Banks and mortgage lenders were still reluctant to make these risky loans so the government increased the role of Freddie/Fannie to guarantee these loans. In other words the government removed the risk. With risk removed the bankers went wild making loans, refinancing, making equity loans. Yes banks made truckloads of risk free profits, they are in business to make profits for their stockholders. Who are the stockholders? you and I (among others) via our 401K’s, institutional investors etc.

    Since Fannie Mae and Freddie Mac are socialist government creations anything they guarantee is ultimately guaranteed by the taxpayer. The taxpayer assumes the risk. You and I get the bill.
    Steve

  12. Stephen K Says:

    Emma-Lu,
    Now the banks have a pile of junk mortgages, what do they do with them? This gets into areas of fraud, greed, mania etc depending on your opinion. Irrationality.

    Usually what banks do is bundle mortgages together and resell them to institutional investors.

    So a $10 million bundle of A+ mortgages (assume 20yr, 5%) over 20 years is worth ~$16 Million (value). There is a long historical record of these loans and the default rate is around 1-2%.

    The problem is that a $10 million bundle of junk mortgages (20yr, 5%) is of uncertain (junk) value, even through Fannie/Freddie with guarantees. There is no long historical record of defaults and everyone knows it is high. But the industry needed a way to get rid of (market) them.

    So A+ mortgages were mixed with junk mortgages to create the bundle. Of course this didn’t hide the junk mortgage nature of the bundle. So they wrapped it up in a Credit Default Swap, or similar, (derivative) and invented mathematical models to spread/hide the risk. There are rating agencies the market trusts to rate the quality of investments. Fraudulently they rated them as A+. They were sold and resold around the world to the point where value was no longer connected to price. The bubble got bigger and bigger until it popped. During the bubble(mania) people were paying a price many times the value. (maybe $50M for a mixed A+/junk bundle rationally worth ~$16M tops)
    Supposedly there are derivatives out there priced at up to 30 times the value.

    Basic investing 101 says you should verify the underlying value of your investment (collateral). Obviously during the mania people didn’t care what the value was. they were making money.

    The issue for the industry now is that when the bubble pops price is reconnected to value. There are many out there holding worthless paper (value of maybe ~10%-22% of what they paid(price)) and they are screaming for the government to bail them out. Ultimately at taxpayer expense. Something for nothing slams up against reality.
    Steve

  13. skahahoo Says:

    Hey Stephen K!

    Thassalotta good info. Thanks! It seems like you acknowledge that there are multiple factors that contributed to the current economic crisis, but that the first domino to tip over and cause this cascade effect was the Community Reinvestment Act. If I’m misinterpreting what you’re saying, then please correct me. ๐Ÿ™‚

    I thought it was odd though that the government would enact a law that would encourage risky financial practices. I mean surely, the banking and financial sectors would lobby against such a law? So I looked up the text of the CRA, and it says that the act is meant to help meet the credit needs of local communities โ€œwith the safe and sound operation of such institutions.โ€ In fact, the Federal Reserve site specifically states: โ€œNor does the law require institutions to make high-risk loans that jeopardize their safety. To the contrary, the law makes it clear that an institution’s CRA activities should be undertaken in a safe and sound manner.โ€

    Now, I understand that just because that’s what the law says doesn’t mean that in practice, the banks won’t feel undue pressure to extend risky loans. But in the end, the law doesn’t say, โ€œYou must make a certain number of a certain type of loan if you want to stay in business.โ€ There are no quotas or anything explicitly stated in the law. So isn’t it the banks’ responsibility to make sure they make fiscally wise decisions? For the health for their own business and the communities they serve? The government was trying to prevent “redlining” by enacting the CRA. Is it possible for these kinds of measures, that are meant to help the community, to be enacted without this kind fallout that we’re seeing right now?

    Thanks for the lesson though about the junk mortgages and derivatives. I never understood that stuff, but you educated me. ๐Ÿ™‚

  14. Emma-Lu Says:

    @Stephen K,
    Wow thank you so much for all the insider information (I’m not American myself so I was fascinated by this). I appreciate that you took the time to carefully and clearly explain both sides. Very diplomatic! I suppose as both you and also Skakahoo have said; in summary; it’s a case of a combination of pressure and planning and impulse right? But things went wrong (as they do). Even though consumerism has now collapsed; only time will tell how soon this can be fixed.

  15. Emma-Lu Says:

    ah man, Skahahoo, I keep typing your name as ‘Skakahoo’, (subs the ‘h’ with a ‘k’). lol it seems I have a lil learning disability with your name.. sorry about that.. xx

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