I've been reading financial articles recently (here and here) talking about the financial crisis, depression, how we got into this mess, and how the government should bail us out of it. And the one word I have to describe all of it is "insanity". Why insanity? Here's why:
Housing:
Banks handed out money like it was candy (insane) because they were making too much money. They would do a loan and then repackage it and sell it to someone else. The good times were rolling. Home buyers had the incentive of big, fancy new houses, rising home values, great interest rates, and easy money to get them into homes. Times were good (insane). Things started to unwind when people had their adjustable rate mortgages adjust upward and they started not being able to make their payments. When more people were unable to make their payments they had to sell. When more people had to sell that slowed down the rate of home value increase. When the rate of home value increase reached 0 and house values started to go down, the snowball effect was complete and got larger... Home values started going down, more mortgages went into foreclosue, people started to owe more money on their homes than they were worth, etc... and here we are today.
Consumer Spending:
People were borrowing heavily to buy new cars, new boats, new clothes, all great for the economy as long as home values continued to go up (insane). They would either rack up debt on credit cards and then fold that into home equity lines of credit or go straight to the home equity lines of credit to pay for things like investments, vacations, renovations, etc... (insane). Again, as long as home prices kept going up things seemed to be going well. Once people could no longer borrow against their home, and on top of that home values started to fall, people started to feel poor, and hence slowed down spending. Consumers slowing down spending is bad for the economy (insane)..
Businesses:
Lots of businesses depend on consumer spending, when consumer spending goes down then the businesses usually shrink and start laying people off. And the downward spiral continues.
Solutions:
The articles that I've been reading talk about fixing the current recession by having the government bail out banks and inject cash into the system to restore "liquidity". That means that the government should give away money and allow people to keep borrowing money so they can spend it (insane). And they also seem to say that having normal people slow down their spending, pay down their debt, and start saving money is a bad thing because it will cause the economy to get even worse (insane). I say that is exactly what people should be doing.
Total Money Makeover:
The total money makeover was made popular by a guy named Dave Ramsey. He even has his own tv show. The funny thing about his message is that it is not anything new, it is common sense. Just like the common sense way to lose weight is to burn more calories than you eat, the common sense way to be more financially secure is to get out of and stay debt free, pay for everything with cash, and save and invest your money. It is simple in theory but difficult to do. Imagine if it became the norm in America again to buy a car with cash? Or to pay for that trip to Costco with cash? Who would lose out? The predatory banks of course, those same predatory banks that we just bailed out.
Our Government Needs A Total Money Makeover:
In order to bail out the banks and inject capital into the economy to get people to start spending borrowed money again, our government is having to borrow money. At some point the US Government credit card is going to get maxed out. What are we going to do when that happens? Have the US government go bankrupt? Print more money and get rapid inflation? How about paying down our debt and balancing our budget? I guess it is hard to do when it is someone else's money...
Conclusion:
In conclusion I think we need a return of common sense. Here's the plan, work hard, pay off any debt you have, pay cash for the things you buy, and save your money because you are going to retire some day, and no one else is saving for your retirement. That probably means not eating out as much or going on as nice of vacations or whatever for a little while, but in the long term we will all as individuals and as a country and world be better off for it.
Housing:
Banks handed out money like it was candy (insane) because they were making too much money. They would do a loan and then repackage it and sell it to someone else. The good times were rolling. Home buyers had the incentive of big, fancy new houses, rising home values, great interest rates, and easy money to get them into homes. Times were good (insane). Things started to unwind when people had their adjustable rate mortgages adjust upward and they started not being able to make their payments. When more people were unable to make their payments they had to sell. When more people had to sell that slowed down the rate of home value increase. When the rate of home value increase reached 0 and house values started to go down, the snowball effect was complete and got larger... Home values started going down, more mortgages went into foreclosue, people started to owe more money on their homes than they were worth, etc... and here we are today.
Consumer Spending:
People were borrowing heavily to buy new cars, new boats, new clothes, all great for the economy as long as home values continued to go up (insane). They would either rack up debt on credit cards and then fold that into home equity lines of credit or go straight to the home equity lines of credit to pay for things like investments, vacations, renovations, etc... (insane). Again, as long as home prices kept going up things seemed to be going well. Once people could no longer borrow against their home, and on top of that home values started to fall, people started to feel poor, and hence slowed down spending. Consumers slowing down spending is bad for the economy (insane)..
Businesses:
Lots of businesses depend on consumer spending, when consumer spending goes down then the businesses usually shrink and start laying people off. And the downward spiral continues.
Solutions:
The articles that I've been reading talk about fixing the current recession by having the government bail out banks and inject cash into the system to restore "liquidity". That means that the government should give away money and allow people to keep borrowing money so they can spend it (insane). And they also seem to say that having normal people slow down their spending, pay down their debt, and start saving money is a bad thing because it will cause the economy to get even worse (insane). I say that is exactly what people should be doing.
Total Money Makeover:
The total money makeover was made popular by a guy named Dave Ramsey. He even has his own tv show. The funny thing about his message is that it is not anything new, it is common sense. Just like the common sense way to lose weight is to burn more calories than you eat, the common sense way to be more financially secure is to get out of and stay debt free, pay for everything with cash, and save and invest your money. It is simple in theory but difficult to do. Imagine if it became the norm in America again to buy a car with cash? Or to pay for that trip to Costco with cash? Who would lose out? The predatory banks of course, those same predatory banks that we just bailed out.
Our Government Needs A Total Money Makeover:
In order to bail out the banks and inject capital into the economy to get people to start spending borrowed money again, our government is having to borrow money. At some point the US Government credit card is going to get maxed out. What are we going to do when that happens? Have the US government go bankrupt? Print more money and get rapid inflation? How about paying down our debt and balancing our budget? I guess it is hard to do when it is someone else's money...
Conclusion:
In conclusion I think we need a return of common sense. Here's the plan, work hard, pay off any debt you have, pay cash for the things you buy, and save your money because you are going to retire some day, and no one else is saving for your retirement. That probably means not eating out as much or going on as nice of vacations or whatever for a little while, but in the long term we will all as individuals and as a country and world be better off for it.
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