Saturday, October 11, 2008

Crash (the economy)

Of all places, This American Life spent a good amount of time last Friday (the third) getting into the details of the credit crisis. You can listen to it online or as a podcast. It's the best explanation of the credit crisis I've heard yet. The episode goes over the problem with "credit default swaps" and how a crisis of confidence and a lack of regulation crashed the economic system. Also of interest was the observation that the West has accumulated far too much debt over the last 30 years, which really means, if you're under 50, everything you know is wrong.

What comes next? The bailout package is discussed, especially how many economists believe the real method for fixing this is to infuse that $700 billion into buying up preferred shares of banks rather than their crappy assets. This gives them the cash they need to operate and lets the market work out how to deal with toxic assets. The real issue is that it's unlikely the West will get a chance to run with such a high debt level in the future. This means everyone: consumers, banks, and governments. Oh yeah, and there's plenty of blame to go around for everyone.

On the positive side, many new ideas and new businesses pop up after a crisis like this. Current business owners and entrepreneurs are deep thinking about their role in that new future and what opportunities they can take advantage of.

1 comment:

  1. "Also of interest was the observation that the West has accumulated far too much debt over the last 30 years, which really means, if you're under 50, everything you know is wrong."

    I haven't listened to the show yet, but there are some of us under 50 who have long realized that the culture of personal debt is a bad thing.

    On a macro level it has similarities to a pyramid scheme. Consumer spending is often fueled by consumer debt, but eventually the credit runs out.

    On a personal level I've been able to more or less spend what I've wanted to in my thirties because I never ran up a debt in my twenties. It means that whatever money I make (after taxes at least) is my money. I don't owe any of it to banks or credit companies.

    Shit happens and sometimes personal debt is unavoidable. I've definitely had a bit of luck in avoiding those situations, and certainly don't criticize those who haven't been as fortunate.

    Then again, I've often noticed that people my age have a hard time differentiating between a necessity and a luxury. A car is a necessity for many Americans, but that doesn't mean that buying a Lexus on credit is a necessity when you could buy a used Toyota for cash instead.

    Business debt is another issue entirely. "It takes money to make money" may be a cliche, but it's a cliche because it's true. Taking loans in business is part of doing business. Even the most successful business sooner or later finds itself in need of more cash than it has on hand.

    This is why the fear of a lack of credit scares the market so much. Without credit otherwise stable companies will miss out on good opportunities at best, and end up failing over a temporary cash flow problem at worst.

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