An Engineered Crash?
When you make credit easy, if it becomes too easy then the economy shifts toward areas that are a byproduct of credit regardless of need. Some economists say we misallocate resources. In other words, since credit is so easy, we proceed with projects that have marginal rates of return. In some case, if the credit is easy enough, such as overfinancing an office building on future rent growth, the initial return may be negative.
There are other misallocations as well as students focus on careers in the finance sector and other professions start shifting into the finance sector such as becoming a real estate salesperson, mortgage broker, or real estate flippers.
That is what happened in America after 2001. We went nuts with giving everyone credit and practically our entire booming economy became derivitive on the extension of credit. We built and sold to each other houses, condos, office buildings, shopping centers and a pace and price never seen before. In many cases, we built those structures and businesses simply to support the credit creation business or those that benefitted from it. Millions of square feet were built and millions of jobs were created.
The irony of all this, aside from the bankers, the government was the biggest beneficiary of the credit bubble. Many of us are paying 2X or 3X our old property taxes but with incomes not much different than before the boom... unless you work for government. In a number of professions, incomes are now lower than pre bubble levels.
The bubble grew bigger and bigger, so did the size of government. As a matter of fact, it doubled in size to match the growing bubble economy. We built a $6.5 Trillion dollar bubble profit eating machine... employing over 20,000,000 Americans and a driver of incredible revenues back into the private sector through programs like medicare, medicaid, welfare, food stamps and now unemployment checks.
At the time, maybe to keep the government machine fueled, the FED was even encouraging society to borrow more and take out adjustable rate mortgages. The banks were soliciting everyone and everywhere. Heck, rules were so lax you could borrow money without even an income verification. Price became secondary and payment was key as money was flowing everywhere....especially to bankers and government.
All was fine as long as the credit was easy and the money was flowing in...the problem was we were accumulating debt along the way. And debt was being accumulated by practically every sector of the economy including individuals, businesses, municipalities, schools, and hospitals.
The BIG problem came in when society/economy overdosed and was infected with too much debt. Instead of relieving the debt burden on the economy, the Fed and government increased the strain by raising interest rates, tightening credit standards, and hardening the bankruptcy laws.
Those that saw it knew what was coming next....my guess is that so did many in New York and Washington as we were being told Sub Prime was contained. Debts started defaulting at all quality levels, millions of jobs were lost, and wages and prices of assets crashed. Without easy credit, much of the economy was gone or much smaller.
However, the accumulated debt had to be serviced at rates that were impossible to service based on a reduced credit and lower revenue economy. For many, savings had to be tapped to cover the shortfall.....and now many are running out of savings including families, businesses, municipalities, and hospitals.
As savings continues to deplete, more and more will be zombulated and our economy will shrink even further. As the economy shrinks, even more and more will be zombulated regardless whether they have any debt because revenues streams will be so low they won't be able to cover fixed costs.
If we just unwound to prebubble levels, GDP would contract over 30%...but it's likely we would over shoot. Our cities will go broke, so will our school districts, and hospitals along with pension plans and millions of businesses as few will be able to cover debt service.
The only way to solve this problem is restructure all debt and restructure it now. JUST LIKE WE DID FOR THE BANKS. If not, we will have very little economy left as our nation is littered with shuttered and bankrupt families, businesses and municipalities.
If Obama and the Fed try to print out of this enormous mess, interest rates will skyrocket and our money will be worth essentially nothing as few will be willing to accept it. Why should China loan to us when it can just a easily loan to its much lower indebted citizens?
So there you have it, our nation is infected with a level it debt it mathematically can't service and the only thing coming out of Washington and the Fed is telling us they are trying to make credit easier? The only people benefitting from this policy is the bankers and buddies of Benny the B as the rest of the nation crashes.
You would think it was the goal to drive this economy into the ground based on current Zombulation stratagies.
Get ready, the municipal, hospital and school defaults are going to have an immediate impact on our lifestyle and public safety. So will the loss of millions of additional jobs. Jefferson County is the first....there will be many more to come under the current policy direction.