Saturday, April 12, 2008

Grandma's wisdom

How did competent business men get themselves into the mortgage mess? It’s simple, they gambled, and they convinced their customers (home buyers) to gamble with them. We, in the guise of the government, helped by setting up the rules to allow them to gamble.

The lenders, the home buyers and the government gambled that the home buyer would not loose their jobs. They gambled that the home buyers would get raises that would be greater than the expected increase in payments caused by the increase in adjustable rate mortgage interest.

Anyone who has been working for a living knows that expenses have been going up faster than salaries for at least 10 years. Ask any carpenter, electrician, or auto mechanic. We’ve seen jobs running for low wage countries for at least 12 years and maybe 15 depending on what leading indicators you pick.

Every working man has seen this coming, it’s only the economists and politicians who are surprised. I think their surprised because they don’t live in the same world as the rest of us. Mostly, they live in a world of theory, which reduces real world actions to numbers on a page. That makes it easy to analyze events, but it also provides a buffer against the emotional impact.

That lack of connection makes it possible to miss the small leading indicators that those of us that have to figure out how to make a living spot and include in our assessments. When we see a large percentage of our industry being laid off, we suspect a problem. While it’s a significant percentage of my industry, it’s a very small percentage of the overall work force.

Where I see a leading indicator, the statistician hardly notices. I see a lot of very small leading indicators and recognize a potential problem. For the statistician, since each one is so small, it’s not a significant measurement.

Working people see the problem coming where the statistician misses it completely. Perhaps grandma’s wisdom is still more accurate than all the complex calculations.

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