This is a Bottom-Up Problem as much as a Top Down problem.
It’s interesting to blame Wall Street and the exotic derivatives for the economic issues we face, but I see the problem stemming as much from something much more bottom up and basic- fuel costs and high gas prices.
In the beginning…..
This whole financial melt down we’re experiencing started out, primarily, from high gas prices. When people are budgeted out to the penny, or are living up to their income level, it doesn’t matter if you are rich or poor. If you have no liquidity in your finances, any unexpected expense can bring the house down. While as a percentage, the gas price increase was like an excise tax on the less well off - suddenly, it costs twice as much to get to work, and the costs passed on in terms of increased postage, grocery costs, etc. – it put a further dent in a budget without a lot of room to give to begin with.
But what about the mortgages?
The first wave of foreclosures occurred primarily in people who borrowed the maximum amount of money they were offered, without very much understanding of what this would mean in cash flow terms, on a month to month basis. This meant people regularly bought houses they thought they could afford because the bank said they could have up to (insert maximum figure here) , not realizing that somewhat less than the maximum was probably a better decision. (After all, the bank will lend you money, but they really don’t care if you eat ramen noodles or steak, as long as you make your payments. And no one says you have to take all of the money they offer you.)
But when you bought a house that was all you could afford, it meant that things like the heating bill for the dream house weren’t included. Or Taxes and sewer. Or the new mower you’d need for the backyard. Or the cost to repair the dishwasher.
People got sucked in by the dream. Reality is often less lovely. Money being tight is one of the main reasons people fight and get into relationship problems and is a major cause of divorce. And divorce is always expensive, emotionally and financially. If you couldn’t make things work financially in one house, how can you do it in two? We’re going to see a skyrocketing divorce rate, I would bet serious money on it, as a result of the financial crisis, but that is no one’s primary concern at the moment, with the possible exception of one of my heroes, Elizabeth Warren and her interest in the vanishing middle class in America.
So the increase in gas prices and groceries, basic necessities to get people back and forth to work, tipped the fragile financial boats first. But that also meant that a lot of people, including less vulnerable people, also had less to spend on basic consumption and needs, and began to tighten their belts. The outgoing rapidly began to exceed the incoming funds. And people didn’t have any idea when the prices would top out or moderate, if at all. So they began to save more, almost immediately, starting to understand they weren’t sure what the next month’s bills would bring.
The cut back in consumption meant people started losing their jobs, because not enough people were spending money like the used to, coupled with the fact that transportation costs for everything in the stores went up, prices went up, exacerbating the situation of no one spending. People tipping over the edge financially, especially after a job loss began to use their credit cards to try to pay the mortgage and more basic expenses like groceries, but couldn’t pay it off at the end of the month. Credit card companies have begun to worry about these folks defaulting, and have upped late charges and interest rates to help cover their risk and losses. And the last thing a fragile financial ship needs is a credit card with interest rates approaching 30%.
(Frankly, getting money from your local loan shark probably comes at a better interest rate and with better terms than you get from some of the banks these days- does this mean we are at risk for a resurgance in black market banking? Maybe.)
So because of the overall slowdown in the economy and the risk of foreclosures along with real ones taking down Wall Street, we have seen tons of layoffs. People are looking for new jobs, but can’t move as readily, because it’s taking longer to sell their house if they have to move for a new job. Local jobs may be harder to come by and take longer to find, assuming you can find one that will support your previous level of income. People who are out of work are trying to make ends meet with unemployent (which will run out), severance pay (which will also run out), and credit cards (which will max out). And them you will start to see the next large wave of foreclosures happen, for people who were making ends meet rather well, until they had a job loss. And then unable to meet expenses, they will not only default on their home loans, but on their car loans, credit cards, and any other debt obligations.
So while I want to believe that the credit crunch is over, and the economy will start being productive again, there’s a lot of financial mess to still shake out of this economy. People laid off are having a hard time finding new work, and even entrepreneurs are finding it hard to start a new business or market themselves in an economy where people are naturally focused on needs, not wants. (And god forbid you are undercaptialized in your business, because any small problem and you go under, too.)
We’re vulnerable to things like gas prices and health costs which are not fixed, but fluxuating parts of the budget process. The more volatile the fluctuation, the more people it will take down with it. Even with lower gas prices now, we see them gradually creeping up from a local all time low around here of $1.57 per gallon to $2.45 per gallon and rising. While this is far below the $4 plus a gallon we’ve paid, prices at the grocery haven’t gone down much, and we’re vulnerable to additional increases at any time.
So why we all wee the mortgage crisis and banks as the scapegoat for the meltdown, I see them as secondary effects from the rapid increase in gas prices which flodded the ship that has yet to be able to right itself again.
What do you think?