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We have is a debt problem.
For the past 68 years, an ever expanding debt base helped grow our nation and our economy. For much of that time our productive capacity grew as we sold products around the world. In the past 30 years the debt really started to take off. In the past eight years, we went nuts as everything became dependent on simply borrowing more and more money and less and less on making and selling things.
We really don't have a credit crisis. That is only what the media calls it.
We have a debt crisis because people can't pay their debt and now a credit crisis because banks have very few people qualified to borrow. When people can't pay their debt.....debt defaults. When debt defaults banks lose money. If banks lose money they don't have capital to lend in addition to the fact that very few are capable of borrowing. Combine the two and you really have a credit crisis.
As long as banks kept extending credit to anyone and their mother, defaults were limited because people could just borrow more to service existing debt.
This was especially true in housing. At the peak of insane lending practices...banks even extended credit to homeless people to buy homes. As people borrowed with ease to buy homes, home prices went up. As prices went up, people borrowed more and price didn't matter as long as they could borrow. Then after buying the homes, people borrowed even more and really started doing stupid things like taking perfectly good countertops and replacing them with stone. Taking very nice appliances and replacing them with stainless steel that showed fingerprints everytime someone opened the door.
We borrowed and borrowed and borrowed. And then started borrowing to service the borrowed money. With that borrowed money, we spent it everywhere. Homes, stores, vacations, cars, dinners out....if we could borrow, we could spend.... and if we could spend, business went nuts...here and many other places in the world....especially Asia.
Shipping companies were building boats as fast as they could to bring stuff over for those borrowing and spending Americans. As we purchased more, the countries selling us stuff started booming and their people started borrowing and building..... sometimes buying our stuff. Our business went nuts even more by selling not only to Americans who were borrowing, but to foreigners who were now buying and also borrowing.....just no where near the extent of Americans.
If business went nuts then everyone was happy. Jobs were plentiful. Profits skyrocked so tax revenues exploded. Do you think exploding tax revenues were enough for our politicians....heck no!!! they started borrowing against the higher revenue stream and started spending too!!!! Schools, parks, roads, hospitals, new buildings....you name it...if cities could borrow they would and spend it everywhere too....guess what???....business loved it too...profits really went through the roof and jobs were plentiful because everyone was borrowing and spending...and as everyone was spending, business was borrowing to satisfy the higher demand.
And since everyone was working, health insurance companes could extort employers and workers for ever increasing insurance premiums to pay for higher and higher health care costs. As premiums rose, health care costs increased, as health care costs increased, premiums rose....as long as everyone was working....it didn't matter that their wages were stagnant and health care was taking a bigger and bigger chunk of their paycheck.......they could borrow to make ends meet.
As the debt grew bigger and bigger, the bankers became worried because debt coverage ratios became dangerously tight.....NO PROBLEM...securitize the debt and sell it to some idiot (your pension fund manager and overseas banks) who didn't appreciate the extent of how much of the actual economy was really a ponzi scheme built primarily on people borrowing. If banks kept securitzing and selling off the toxic debt, the could report amazing profits as long as no one caught on.... take huge bonuses, and no one would know the difference until the bankers were long gone or had taken so much in bonuses it really didn't matter.
Remind anyone of a utility dumping toxic waste in the ground water to save money and pad profits......????????
As long as people kept borrowing, banks kept the charade going. In the early stages, if a person got in trouble, no problem...they could sell their house to some idiot who could borrow 5X their income and then pay off the debt and start all over. This worked fine, until too many people started getting into trouble because too many borrowed too much. By this time everything was dependent on debt....and I mean EVERYTHING!!!! As long as the banks kept extending credit so borrowers could borrow more to pay off the money they borrowed, everything was fine. The balloon grew bigger and bigger until it covered every aspect of our economy.
Who cares if we didn't make anything.....we could borrow and borrow and everything would boom!!!!
Housing, Car Sales, Air Travel, Hotels, Retail, Business Profits, Finance, Tax Revenues...we are already way over half the economy and we could keep going.......was dependent on borrowing. Not only that, industries borrowed money to expand to satisfy the increased demand from the frenzied borrowing until just about everything in America was leveraged like NEVER BEFORE IN HISTORY.
The reason banks have a credit crisis is because people can't pay their debts. People can't pay their debts because banks won't loan them more money to service their debt like they used to......if people can't service their debt....not only do they default on their debt hurting those that hold the debt....they can't spend any place because they are insolvent hurting businesses and employees across the country. Not only are businesses hurt, but incomes implode evaporating tax revenues deepening the slowdown cycle even further as cities and states are starved for cash.
At the end of the day, you can take whatever side you want.....was it the people's fault for borrowing too much, or the banks fault for loaning too much to those they should have known couldn't pay them back. The bankers didn't care because they were making bonuses in amounts NEVER before seen in the History of the World.....and by the time the party ended....they were so rich it didn't matter. So you pick..... was it the borrowing users fault or the toxic credit extending dealers???????
Alstry says BOTH!!!!!
The joke now is that we are bailing out the dealers and punishing the users by foreclosing on the borrowers homes, kicking them out of their jobs, and putting them and their families out on the street......do you see Jamie Dimon panhandling???????
Now the slow down is spilling over to those that did nothing wrong due to an economy slowing down for EVERYONE.
Quite frankly, at this point it really doesn't matter......revenues are dropping so low that almost everything is going to be insolvent. PERSONAL INCOME TAX RECEIPTS WERE DOWN OVER 64% IN FEBRUARY!!!!!!! How many families, businesses, or municipalities in America can survive on that kind of revenue decline???? We see what it is doing to the auto companies....it is happening to the airlines, hotel industry, retailers, restauranteurs, mortgage brokers, builders, architects, and on and on................it will now affect health care as fewer and fewer will be able to afford health insurance and banks won't let people or businesses borrow to pay premiums like a few years ago.
THIS PROBLEM OF DEBT DEPENDENCY HAS NEVER HAPPEND BEFORE IN AMERICAN HISTORY. Prior to The Great Depression, we as a people had very little debt. Municipal debt was almost non existent and corporate debt was somewhat abused, but in a very concentrated manner. People purchased homes on eight year mortgages with 30% down. Much of the population paid cash for everything and our economy was just starting to grow much like China today.
Now debt is defaulting and the media is calling it a credit crisis???? No.... it is a debt defaulting crisis......and if we loan more money it will make the problem of having too much debt even worse....so what is the solution????.......EASY.....get rid of the debt by allowing it to default... or restructure it to a level where it can be serviced witihout requiring more debt. But by extending credit, or loaning MORE money, to someone who has alreay borrowed too much makes a bad problem even worse.
So Alstry.... when will this mess be over????....very easy....when the debt has been restructured so that it can be serviced at a sustainable level based on an economy that isn't dependent on debt to function.
As I see it...we are only at the beginning of letting the air out of this HUGE baloon....we have a long long way to go..........no matter what the Techno Fairies tell you, what the TMF bloggers blog about, or Alstry says.......if we can't borrow to service the debt, the debt will default....as long as the debt keeps defaulting, the banks will not be able to lend and banks will need more and more capital just to stay solvent....if the banks don't lend, business will slow further causing additional layoffs and bankruptcies, and more and more people will be unable to service their debt......causing more and more debt to default.........and round and round we go purging the debt until businesses, people, governments, and families have economically shriveled to the size of a raisin and we can start all over again.
The longer we allow this process to take....the longer the pain will last.
So ask yourself.....do you solve a debt crisis by creating more debt??????? That one is easy....we solve it by getting rid of the debt......inflating the currency doesn't solve a thing because the debt remains and prices increase faster than wages forcing people to borrow even more as they get further and further behind.
The quicker we get rid of the debt....the quicker we can restart our economy. The sooner our politicians realize this.....the better for all of us.
Now these are the kind of blogs TMF bloggers should be blogging about.....not whether Alstry goes a bit over the top because he is upset that our American banks our outsourcing American jobs with American TARP funds.
Evil triumphs when the good do nothing. Alstry doesn't have the reach of Motley Fool. Now you know the problem.....let's solve it together....let's get the word out!!!!!!!!!!!!!!!!
Have a great evening.