Credit Crunch

By Terry Forsberg PLLC, CRS, GRI,CDPE, CIAS, Associate Broker

February 10, 2009

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It’s no secret that the U.S. economy is in trouble.  We’re in the midst of the biggest financial crisis since the Great Depression.  But how we got here, what it means for the average American and how we can fix it is pretty confusing. “We all want to know what this $700 billion bailout really means and why it matters to everybody, not just the folks on Wall Street.

CNN senior business correspondent Ali Velshi is giving a lesson in Economic Crisis 101. He’s been poked fun at for his gloom and doom financial reports, but the current situation is no laughing matter. “It’s serious,” he says. “But the fact is we’ll get through this if we understand how it affects us and what we can do.”

The first step toward grasping the bailout plan is to understand how we got in this mess in the first place. Ali says it started with three basic assumptions about the American economy: homes will increase in value over time, wages will go up over time and investments in the stock market will go up over time. “Very rarely do all three not go up at the same time,” he says. “So we thought that things will be better for us financially year after year.” The banks encouraged that concept, Ali says, because the more the American people spend, the more money banks make.

 Ali says that since Americans thought their finances would increase over the years, they spent as if that money was guaranteed. “We all lived a little beyond our means and then a lot beyond our means,” he says. “Now, our country, our people, our banks and our government are all heavily, heavily indebted and the money is running tight.”

Credit Crunch

The other key to understanding the financial mess is understanding credit, Ali says. “Let’s show you how central credit and banking is to your life,” he says. “The bank gives you a credit card, and you use that to spend money at the grocery store. But the bank also gives the grocery store money because the grocery store has to [borrow] to buy things from a supplier, let’s say the cereal factory. …The supplier [or cereal factory] needs to buy wheat or flour, so they borrow money from the bank [too].” But because of the current economic situation, banks don’t trust anyone to pay them back, Ali says. “Your credit line, if you did nothing wrong, may have been reduced by the bank just because they are scared that you might get into trouble.”

Ali says that, due to credit reduction, the cereal factory can’t buy as much wheat, and the grocery store can’t buy as much cereal. When stores or suppliers can’t afford to buy as much they used to, they can’t do as much business. Then, people get laid off.

As a result, all the people who lost their jobs aren’t paying taxes or shopping as much, Ali says. “They’re a net drain on the financial system. They’re not contributing.” Ali says that in the first nine months of 2008, 750,000 people in the United States lost their jobs. In September 2008 alone, an incredible 159,000 jobs were lost. “This is what hurts this system,” he says. “And that’s why it affects you.”

In order to start fixing the financial problems plaguing the country, the U.S. government has proposed a $700 billion bailout plan. “People were phoning their congressmen and congresswomen saying, ‘We don’t want you bailing out these fat cats,’ because the perception was we were helping all these guys on Wall Street and they were going to get richer and richer even though they’d done all of this to us,” Oprah says. “But it’s really all of us who are going to be affected.” 

Ali says that if the bailout doesn’t get passed, credit will get even tighter and more jobs will be lost. “Inadvertently, we’re going to have to help Wall Street to get the money trickling down to you, because that’s the system through which money flows,” he says. “But there’s a real reason to be angry.”

Still, the task at hand should be to fix the problem instead of wasting time blaming Wall Street, Ali says. “The bottom line is it’s like your 3-year-old has set fire to your curtain, and you’re having a conversation about whether 3-year-olds should have matches or whether your kid’s a brat,” he says. “Put the fire out, and have the conversation with your kid later. That’s the situation that we’re in right now. The fire is going to consume your house if it does not get put out.”

 

 

 

 

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