Friday, October 3, 2008

The "experts" really don't get it.

I know I’ve said this before and you may be getting tired of hearing it, but the “experts” I hear analyzing the current financial crisis really don’t understand the problem or the solutions that will really work!

The problem’s root cause is people not paying their loans. Why aren’t they paying their loans? They really would rather pay for and keep their houses, they would really rather pay their credit cards every month.

Most of them didn’t get into trouble by over spending, they got into trouble because productivity in the US is much higher than 10 years ago. This means that companies can produce the same amount of goods for less labor. It also means fewer workers in that industry. A lot of the manufacturing is now being done overseas and that means fewer workers in the off-shored industry.

How can unemployment be low if all those workers are being laid off? They are finding jobs, but the jobs don’t pay what the old job did. Or they had to pay their own relocation expenses and that big expense put them behind on the rest of their bills.

Easy credit made it possible to try and keep up their life styles by using equity in their houses and credit cards. That cash flow problem for banks caused by mortgage defaults is exactly the same problem that individuals have been having for several years just bigger and more concentrated.

The only solution is better paying jobs and lots of them. I watched a news piece on CNN where they were interviewing the owner of a gourmet popcorn shop and he was saying that because business was slow, he had already used his line of credit and couldn’t get an increase to help during his slow business season. He was not taking a paycheck so that he could pay his employees. Can you imagine the senior managers at any big corporation not getting paid so that they didn’t have to lay off workers?

Until the big corporations understand that capital circulates. Money in a bank is loaned to build houses and the paychecks for the carpenters and the carpenters buy the cars and washing machines that the big corporation makes and sells, some is put into the bank and loaned again. But that money is just a place holder for the hours of labor and if your not putting into the system (by hiring and paying your workers well) there will not be money in the bank for you to borrow to operate your own business.

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