Watching the ups and downs of the economy is enough to give the casual observer whiplash. As we wrote this article, the nation’s capital was gripped in a heated debate about how to save our economy from a grave danger. But while Congress was bickering, Americans wanted to know what the heck is going on. Here’s our attempt to explain the situation in plain English.
- What happened to the economy? Let’s think of the economy as an overweight, middle-aged man, who just had a massive heart attack. The paramedics had to pull out the defibrillator and use the paddles to jump-start his heart. That’s not so far off from what happened to our economy. Its heart stopped oh-so-briefly, our government pulled out the paddles, and now debates on how to use them. Will the patient die? No one knows for sure, but odds are pretty good that he’s going to pull through. However, an extensive period of physical therapy will get him back to normal.
- What caused the heart attack? Our patient, the economy, needs blood to circulate freely in order to live. The economic equivalent of blood is credit. Businesses and consumers need to be able to access money in order for the economy to function smoothly. For instance, a small business owner may need to borrow money to build a warehouse or upgrade a piece of equipment. A consumer may need to borrow money to buy a house or a car. Unfortunately, the market for that money – the credit market – seized up, just like a clogged artery. So the government has to do something drastic to get that blood (again, think of economic blood as money or credit) flowing again.
- How did the arteries get clogged to begin with? Anyone who has had a heart attack knows that clogged arteries typically don’t just appear out of thin air. They come from genetics, poor diet, lack of exercise and other factors. The same thing happened here with the U.S. economy. In this case, the weak housing market was the culprit. Roughly 15 years ago a decision was made to try and expand homeownership by lowering minimum required down payments and credit standards. It sounded like a good idea at the time — give more money to more people, they will own their homes, and the subsequent pride and hard work it takes to maintain a home will lift communities. However, Americans who bought more home than they could afford took advantage of these standards. The resulting supply and demand frenzy pushed home prices sky high, and the arteries got clogged.
- Who is to blame? It’s very easy to blame banks for making home loans to people who couldn’t afford them, mortgage brokers for pushing hard-understand mortgages to borrowers who didn’t understand the consequences, and investment banks for packaging and reselling those mortgages in a whacky alphabet soup. However, the root cause is not that straightforward. Truth be told, many of us shoulder some blame for this mess as well. Many of us bought more home than we could afford, lived life large by using home equity lines of credit, and topped this off by putting anything else we wanted but couldn’t afford on our credit cards.
It’s never fun to consider that we may have had a hand in the problems. But look we must if we are to avoid repeating these mistakes in the future. There will not be a quick or easy answer to this problem. However, each one of us can help contribute to the solution by setting an example for ourselves and for our loved ones by committing to live within our means. Our country was founded on the values of hard work, thrift and common sense. More than ever we need to dig deep and call forth a return to those roots.
