On Economics

I should confess here that I am by no means an economist or an expert on these matters. I ride with people who are - honest to goodness, I was asking someone at the BCC what his day job was. When he told me I asked him why I never saw his name in the Report on Business in the Globe and Mail. He replied that a few years ago I would have, but he has been promoted out of that role. So in truth I should turn to him, but I rather doubt he has time to contribute a blog post.

You want to get terrorized? Don't go to the Kingdom of Saudi Arabia and stand in downtown Mecca and declare your unfailing love of the state of Isreal, that's for pussies! Don't go to Belfast and scream loyalist slogans at the top of your lungs - any girly man can do that! Tell Augusto Pinochet you voted for Allende? No I have a better way to be terrorized. Read today's business news.

To a large extent reporters like to make things sound worse than they really are. After all nobody made money selling good news, hence the expression, "If it bleeds, it leads". But the sudden downturn in the economic condition of the World is not just a matter reporters jawboning us into a recession, the is a real problem out there.

Specifically, as I documented in the past, Americans were a little to quick to whip out the Visa card through most of the past ten years. As long ago as 1996 I recall reading an article in the Atlantic Monthly Magazine that described in disconcerting detail how America's economic growth had for the past few years been primarily a result of increased consumer debt and not because of productivity gains. In the 12 years since that Atlantic article the situation has gone from bad to horrendous.

Well the chickens came home to roost.

Starting around 2006 the housing market in the United States started to contract, gas was getting expensive and jobs were becoming hard to find. Meanwhile builders reported growing inventories of unsold properties. At the same time there was another problem, many Americans were over leveraged on their property. Some had interest only loans, for example, suppose you need one hundred thousand dollars, now suppose you can only afford to pay say, five hundred dollars a month, well lets say the bank loans you that hundred thousand at six percent, you pay five hundred a month every month and when you sell the property all you have done is service the interest without reducing the principal one cent. That is alright, because while you bought your home for a hundred thousand it is now worth one hundred twenty, so you pocket twenty thousand, but what happens if your home looses value instead?

Credit card and mortgage companies had other nasty tricks up their sleeve, one nice one was the introductory interest rate, borrow ten thousand dollars against say the Visa card at six percent, or fifty dollars a month, then after say six months jack the rate up to twenty four percent or two hundred dollars a month. Well hey that is not so bad, its only an extra hundred fifty bucks, but what if that happens to your Visa, and your mortgage while your home looses value, you take a pay cut and the price of a gallon of gas goes from less than three dollars to more than four?

People could not make ends meet, they gave up and walked away from their homes, banks foreclosed on homes which lowered the value of all the other homes on the street, so someone who bought a house with a nice big down payment and was paying down their mortgage might suddenly find that their home, once worth maybe half a million was now worth a quarter million but they owed over three hundred on the property. The home owner went from a conventional to sub prime mortgage over night because of something that happened to their neighbours. Meanwhile some homes were now worth between five and fifty thousand dollars, meaning the copper wiring inside a house might be worth more than the property itself. Vandalism of unsellable foreclosed properties skyrocketed. (And yes, you can buy a house in some cities in the United States for under fifty thousand dollars, I have heard that in some places homes now go for as little as four thousand dollars.)

Who is to blame? Well basically everyone in the United States. American borrowers over extended themselves in their massive binge feast. American bankers got greedy, went for short term profits, and loaned money to people who could not possibly pay the bills. American politicians, mostly Republican, took money from the banking lobby and enacted laws written by the banks. To call the laws written by companies like MBNA draconian is an understatement.

What is to be done? I don't know. But I think a good place to start is to make sure that we in Canada, and well everywhere start to live within our means. No more spending money we don't already have, buy a house on a mortgage, sure, but make damned sure you can put some money down and the interest rate is affordable, even if the rate goes up a couple points. Don't decry regulation just because you can, sometimes laws are good even if they limit our ability to over extend ourselves.

On an unrelated note, has anyone seen a Velomobile? Apparently while harder to accelerate it is easier to sustain high speeds in them. They sound cool, but at $8,000 to $15000 a pop I think I'd rather stay with a conventional road bike. Besides I am just having so much fun on Erin why on Earth would I want a banana in the garage?