Is the Sky Really Falling This Time?

Unless a person has been stuck in another solar system or in a perpetual state of unconsciousness, recent headlines are screaming for your attention. The Federal Reserve and other major central banks around the world cut interest rates October 8, hoping to head off what many are predicting as a global economic disaster. House Speaker Nancy Pelosi may ask Congress to pass another economic stimulus package worth about $150 billion. Unemployment rates have gone up, retailers have reported drop in sales, auto manufacturers are cutting production, many companies are laying off thousands of workers, and others are closing their doors. Tell us Chicken Little, is the sky really falling this time?

One thing I can see is the recent falling of gasoline prices at the local pumps. Did supply and demand win out? I find it interesting that fuel prices continue to decline along with the rest of the markets. When gas prices were pushing $4.00 a gallon locally, people started thinking about their big gas drinking vehicles. Seemingly, hybrids, scooters, and bicycles became vastly popular as well. Keep in mind the current $2.77 gallon of gas is still no bargain in my books. I hope that carpooling will continue and excessive fuel usage will not increase with the price of gas decreasing. Consumers still need to watch the consumption and give thought to any new vehicle purchases. The big three automakers have done a quick reversal on truck production and moved their concentration directly toward sales of smaller cars. Having invested a large amount of money toward the development of future cars more economically fuel-efficient, GM, Ford, and Chrysler must be scratching their heads wondering which direction to turn. I hope they do not choose to put us back in the Stone Age and cease development of hybrids, electric and hydrogen vehicles.

The Emergency Economic Stabilization Act of 2008, that sounds politically impressive, will set new government procedures to protect home values, college funds, retirement accounts, and life savings. They all seem like top priorities on my very short list. That word "protect" is a little scary, and it does not mean you will end up better off.

The Bush Administration indicates one goal is to purchase bad loans from financial institutions. Let me get this straight, because the big players in the world chose to loan billions of dollars to people that could not repay the loan, our Federal government is going to step in and help them out of the troubled sea? They are in essence going to buy the rotting potato from the entire bag so not all of the spuds rot. From things I read daily, this is supposed to encourage banks to start lending money again. The credit crisis should ease because all of this bad debt will be gone and everyone can start over again with a fresh chalkboard. Then all of the institutions who made all the bad decisions would be solvent again to repeat their mistakes. Many banks did not go down this road of making poor investments. What is wrong with allowing these banks to step in and fill the void left by the stinking rotten potatoes of the lending bag of spuds?

For decades, people have lived beyond their means at some point in their lives. I have been guilty of this as most people have that are reading this article. Why have we done this? Possibly, because we get hundreds of calls, mailers, and other credit offers thrown our way annually. We are an "I want it now" society. These days I whip out my debit card instead of a credit card but it is nearly the same principal to me. The transaction is quick and easy. Spontaneous spending made easy. Some experts suggest carrying only cash each week for expenses. If the cash runs out before the week, you wait until the next week. Most things Americans buy are luxury things in my opinion, "comfort buying" will get you every time. The grass always seems greener in the neighbor's yard but maybe they opted to save more money. They also could be using a lot more fertilizer!

As of late, speculations have come out announcing anything from another "Great Depression" to market crash, crisis, and panic! If you are like me, I want to know what that really means to my bottom line. Economists fear a credit crunch which means that credit might still be available but with harsher qualification requirements. Does that mean you need perfect credit if you want to purchase a home or car, who knows? Would this not create problems for businesses that depend upon financing options for their customers? Obviously, my 401k account took a large hit this past week but since I have over 20 years until I intend to use that money I will let everything ride and wait for the market to turn. For those close to retirement or already retired, the market crisis certainly presents new challenges.

President Bush continues to call all of the latest financial fiascos "a crisis". Is it a crisis, recession, or depression? The National Bureau of Economic Research defines a recession more ambiguously as "a significant decline in economic activity spread across the economy, lasting more than a few months." John Maynard Keynes, a famous British economist, wrote that when interest rates get below about 2%, people no longer have an incentive to save. If there are no savings, banks get no money with which to make loans, and this in turn causes the regular business cycle to break down. A depression is a severe economic downturn that lasts several years. During the Great Depression of 1929, unemployment was 25% and poor monetary policy was established. Instead of pumping money into the economy, the Fed allowed the money supply to fall 30%.

One thing I am confident about is that the financial situation is not going to change for quite awhile. The plans implemented and the changes occurring will need time to rebound. My family and I had hopes of selling our home and purchasing another this year but those plans may be on hold. Luckily, I have a nice home to live in, a job, and a God that blesses me daily. Faith is what we all must have and in time, like the Great Depression, this too will be a distant memory. If nothing else, this economical tornado will make for thousands of financial "how to" books, our children and grandchildren will be able to pass on stories just as I remember hearing from my grandparents, and locals will have plenty to talk about at the coffee shop. In addition, it takes some of the pressure off the Marshall School Board, recent jury trial, and the November election.

K. Mullins-Lamb