We left off on the previous blog with the question, What can we do about the currrent economic crisis? This is a really big question that can be answered at different levels.  I will answer it for the “average person” and by average I mean someone who is not a government offical, a banking official, a financial regulator, a global leader, or someone who shapes financial policy and decision making. Also, realize that the answer though incomplete, contains the rudiments of a more complete solution.  So first I ask again, what exactly makes for the crisis?  Here it is in a nutshell. 

The low financial IQ of many Americans was preyed upon by financial institutions and mortgage brokers that had little Government oversight and regulation.  All of which derives from an economic philosophy of extremely “free markets” which permited the global heist to occur and set the basis for a drift of wealth away from the citizens of The United States of America.  These statements do require further explanation but I won’t cover it here.

Now with the global raping having occured, the question remains, what are the solutions? 

First, and most importantly is finanacial literacy for all.  Why? Because if this is not addressed then the exploitation will occur repeatedly as the population doesn’t have the knowledge base to prevent it.  And this begins with people getting a firm grip on what happened and why.  More specifically how they too played a role.

We have to face up to our long held assumptions, that we thought were facts, but in fact are not.  This is part of raising our financial IQ, the refusal to buy into long held assumptions just because they were once true.  So here is a string of false assumptions that indicate a low financial IQ.  As you read them see where you fit into this list of assumptions.  It is these assumptions that make us prime as potential victims. 

Housing:  “Your house is an asset”.  ”Buying a house is always a good investment because houses always go up in value”.  “Owning your own home is the basis of wealth.”  If you believe this, then any housing deal will look sweet to you and you  may find yourself “upside down on your mortgage or possibly in foreclosure. Houses are valued at what they can sell for so if salaries stay roughly the same then who can afford to buy your used over priced house?   Do the math on your purchases. And drop the worn out cliches.                                                

Government:  “Your governement is protecting you and your money.” “You will have a job if you do what you are supposed to.” ”America has a job for you if you are willing to work.”  Ask any black person in America if the American promise is a guarantee and you’ll wise up. Self reliance is first and foremost.  Know that no one is really looking out for you like you think. And if they do it is a bonus, but don’t bank on it.

Banking/Investing: “Investing is for everyone.” “Everyone makes money when they invest, especially in mutual funds and 401k’s.”.  “Your broker or banker is looking out for you and your interest. “  It is easy to fall for these lines because who doesn’t want to make money, that is until money is made at your expense.  Greed is contagious.  If you can catch it, then what about the guys who deal in money  for a living. Don’t become somone’s meal.  They may ” Bernie Made-off” with your money (see Madoff pic). 

Ok so there we have it. A not too exhaustive list of notions that went unchallenged for years which have now proven untrue.  And if you still dont think they have been proven untrue, woah! May God help you. 

In many ways Americans have lived alot like “The Beverly Hillbillies”.  The Beverly Hillbillies was a popular TV show from back in the day about a family of rather uneducated and unsophisticated “hillbillies” who struck oil on their land, got rich, and moved to Beverly Hills, California. 

Now I have nothing against hillbillies, though I can’t say some of my best friends are hillbillies. But anyhow, just like in the show, people watched their house, all their investments, and their retirement magically grow and in some cases quadruple, without requiring any knowledge or effort on their part. Which basically created a rather high standard of living for a rather unknowledgeable group of people.  Hence the “Beverly Hillbillies”.  

And just as it was attempted against the Beverly hillbillies in the tv show, Americans were ripped off by greedy bankers, financiers, brokers and the like because there is no better victim than a financial unknowledgeable person with money. 

The only difference between the Beverly Hillbillies and the American populus is the Hillbillies didn’t get taken.

With news reports mounting every day about the economy, job loss, the stimulus bills, the auto industry, wall street, US bank failures, the mortgage crisis etc, people are left disoriented and confused about the economic future of this nation.  Well right here and right now I  will begin to share with my readers some things you can know for sure about the economic future of this nation.  I will start with an analysis of how we got here next I will move to what strategies will and will not work, then I will end with some likely solutions. But rest assured, you can take these truths to the bank.   So here we go. 

First, the basic principle that most folks don’t fully realize. Credit and debt are the same thing. They are two sides of the same coin.  This means when one person issues credit then another person receives debt.   In accounting, its called double entry bookkeeping.   This is a key factor in the current economic problem. Remember that principle, you will see how it affected the crisis.

The second principle can be a bit tricky to follow. It is that an investment is in actually a loan that someone makes to another entity and as a loan it carries risk.  Meaning, the money invested is on loan to some one or some company that will use that (borrowed) money to make money, but at a risk that the money may not come back to the investor (lender) if the the entity invested in is unsuccessful at making money.  The investor gets paid (interest) for loaning the money at a risk. 

Now, with those two things in mind consider the setup of the problem.  Most businesses use credit (debt) to keep their business afloat and to expand.  Also, most people have their retirement money invested (loaned out) whether in mutual funds, cds, or other investment vehicles, or as savings in banks that loan it out to others.  Consider as well that most major purchases, including houses, cars, college education,  etc., are made by consumers thru borrowed money (loans). 

Lastly, keep in mind that State and Local government municipalities invest (loan) tax revenue out to banks and investment firms.  So credit (debt) is being loaned out everywhere and people are counting IOU’s or (debt) as income or “actual money”.  For example, people say things like “my retirement is X dollars” (IOU), “my house is worth y dollars” (debt), ”my mutual funds or stock are worth z dollars” (IOU). The State govermnment has W dollars in investment money (IOU).  All of which is actually true only when you cash out and have the cash in hand or another tangible asset.

Also keep in mind that all this activity runs through the banks and is a very substantial segment of the U.S. economy.  All of this is relatively fine until someone hits the first domino in a long chain of dominos.

Many mortgages (housing loans) were issued on a false pretense that housing values always go up steadily over time regardless of the cost of the house and that the price increase is always greater than the cost of the loan for the house.  Which is not true. Why?  Because salaries have to increase relative to the housing cost in order for the houses to sell.  

As a result people purchased loans (yes loans! not houses) that were way too expensive for them and also at a cost that would go up when their interest rates were reset.  Many soon discovered that they couldn’t afford to pay the loan and that they owned the debt not the house.  So the banks kicked them out the house and  the borrower still owed the loan (foreclosure).

Banks issue loans and sell investments all the time, this is how they make their money.  Remember one persons loan (debt) is another persons investment (credit). How many ways will a bank issue credit or sell investments?  As many ways as they can?  This became the setup for the current crisis because banks repackaged and sold risky loans as investments to other people.  Then sold what amounts to insurance on the risky loans, as another investment offering. This placed risk (the original risky loan) on top of risk (the investment offering) on top of risk (the insurance investments).                 

So in essence you have investments offered on top of investments.                               Or another way of looking at it, you have debt, piled on top of debt, piled on top of debt. This continued unregulated indefinitely until you had a mountain of debt piled up.                                                    

So once the people begain to default on their housing loans then it meant the creditor (bank) couldn’t collect so every investment built on that loan was now bad. Once that string of investments went bad then the banks couldn’t guarantee other investments because they didn’t have the money, so they also went bad, and so on and so on.  Down came the house of cards.

Worst of all, now that the banks had bad loans and debt piled up everywhere that no one could pay back, then the banks could not issue new loans because there was no money to give, only debt.  This paralyzed the economy by freezing major consumer spending which triggered job loss and slowed the housing market and increased foreclosures.  It also dried up the investment market as investments went bad and crippled businesses who could no longer get (credit) loans.  What a mess!

Who can solve it. Republicans? Democrats? President Obama? Doubtful.   

Here is the bitter truth folks that we will have to swallow.  The days of excessive free flowing money (credit & debt) are over.  People will have to really work.  People will have to create and innovate. P eople will have to become globally competitive. People will have to produce in order to have money.  There is no way around it.

Why?  Because the debt is piled everywhere and you can’t print US treasury notes (money) to solve it because those notes are also backed by credit (U.S. debt) extended by foreign investors to the Federal government.  Nor can the banks simply hit the reset button and all of the bad investments (debt) simply vanishes so that they can be back in business loaning money freely.  Neither is a viable solution.  Also with global markets and competition continuing to rise there is no entitlement to market share and business success.  Oh what a tangled web we weave …

So we can’t print (money) our way out of it. The ink toner solution won’t work.  Nor can we go back in time and erase all the debt and all the bad investments and loans.  And it is unlikely that just because the U.S. banks and investment firms ”crapped out at the investment casino table” that we can clean up their books by giving them money or by taking them over because the extent of their indebtedness is not known.  

It is like throwing good money into a black hole, not to mention that giving a private entitiy huge sums of taxpayer money is completely unethical.  Oh and easing taxes? My dear Republicans, will help out a few, a bit, but it also falls way short of bringing us back to where we were or setting the nation back on track.

So what can we do? 

Well you can start by sharing this blog with everyone you know because over the next few posts you will continue to get real answers.                                                   

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