Over one year prior to this crash I was concerned about an economic uncertainty just around the bend told several people, including a client of mine about my suspicions prior to the problem. It was late 2007/early 2008. All of you have read that our situation was caused by too much money being loaned to unworthy candidates in the housing market, banks loaning out too much credit and too much credit in general but while I agree that was part of the problem, in my strong opinion there were other factors working in conjunction with the credit situation and it's those factors that are scaring me because no one is talking about them. These factors could happen again, and it's my concern that if they happen again in this struggling and still horrible economy it could set off a chain reaction around the world that would make this recession/depression we're having now look like a hiccup after eating some small potatoes and that's why we need to talk about it.
I am writing this as i eat breakfast. I was starving this morning and these pancakes are so good. I have been awake since 4:30 am to insure that my wonderful wife had hot water in the guest house for a shower since ours is not working in the house. Hot water and pancakes are a luxury in some parts of the world. Can you imagine yourself without hot water? During the great depression of the 30's they say it was really bad. This current deep recession was called a depression by many in the media, how that determination was made i do not know because i don't know the statistics about the original great depression in order to compare it. i do know this, today many of us are spoiled. We are spoiled in that most of us rely on the grocery store for food. We have to have our hot water and our pancakes, cigarettes (not me, I'm smoke free), vehicles, eat out nights, lunch with friends at one of the many local restaurants etc and you know what? Many of us don't know how to raise our own food. Seriously, i am not saying take up gardening classes, but what i am saying is that people during the great depression made it through by learning how to skimp on the luxuries, but many of them, particularly in rural areas, all had gardens. Today there are fewer and fewer people that know how to raise their own food, and more usable land converted to subdivisions, so if a serious depression hit, and if it were not for welfare, there would be some very hungry people about which would create some serious and terrible situations. Illness, starvation, serious crime and even an increase in violent crimes.
In my opinion what led up to the current financial crisis was not just the credit cards and uncontrolled spending, but something prior which led up to people abusing those generous credit lines in the first place leading down the road to the foreclosures, bankruptcies and bank failures. That's what I want to discuss because that's what I am afraid that it's some of these factors leading up to the problem that will extend this recession and if other measures aren't put in place, could even take us further backwards. In other words, balance the budget Mr. Government. Take a business class and take and economics class and let's get this thing turned around before it's too late.
What caused our financial crisis? I will highlight on the top six:
1. Quickly inflated gas prices
2. Habitual spending
3. Over spending
4. Lose credit regulations and too much credit
5. Bank foreclosures
6. Poor national leadership
7. Monopolies
We have been through what's called a correction and I'm not talking about a ruler slap on the wrist by a nun in Catholic grade school, I am talking about a serious correction, but why let failure correct us? Why not be proactive and fix the failed system before the slap from the big ruler?
How does quickly inflated gas prices and habitual spending fit in? Why are they my first two concerns placed in front of the loose credit regulations and bank foreclosures? Because they both have just as much if not more significance to our current problem and let me explain why and then I will propose a solution, a solution that may not be received well by either republicans or democrats or anyone in the oil business.
For many years we all in this country were used to gas prices being around $1.30 to $1.50 per gallon. When I say "years" what I mean is why in the heck did it stay so cheap for so long? For you who disagree with me and contend that we had it made because gas prices averaged $5 per gallon in the UK for years, then please hang with me and let me help you understand the significant difference. It's mainly the sudden jump in gas prices instead of a gradual one that spoiled our milk our milk here in the States. I can remember gas being around $1.15 when i graduated from high school in 1990 and 15 years later it was not much more. Our economy grew like crazy during those years and except for a couple of much smaller hiccups we were doing great. I have always heard that inflation is around 3% per year so why didn't that apply to gas prices and why the sudden "correction" or spike during the Bush administration? I am not trying to open a can of worms, just wanting this to not happen again and for our country's economy to get rolling again and not take a nose dive. My point is that IT SHOULD HAVE BEEN A "GRADUAL PROCESS" and slow enough for us as a country to digest it and adjust our life styles accordingly. Just one example of the severity of this sudden adjustment in gas prices directly related to the mortgage crisis is the planning of how big of a house you can afford on a fixed 30 year loan. You figure up your "fixed costs" (gas, vehicle payment, utility bills) and a few others and determine how much of a house payment you can afford. Also, minimum wages went up considerably since 1990, from around $3.25 or $3.50 an hour to double that of $7.25 per hour in 2010 or before. The gas/minimum wage cost was significantly out of balance until recently. Basically gas prices are now roughly double what they were in 1990 and so is the minimum wage, but the minimum wage is a little more than double, so YES that is good in my opinion. My next point is that we were making extra money and gas was cheap so for years we got accustomed to spending money, going out to eat every weekend, many of us ate out every day (i wasn't one of those). We got stuck in some habits and scientists and psychologists alike will tell you that habits are very hard to break. So what happened next? Gas prices decide to make their own "correction" and out of the blue they jumped from $1.50 to $3.00 and even around $4.00 per gallon. Now, the purpose of this article is not for me to get shot an killed, because i know there's BIG money in oil, but my purpose is to show that it's my strong opinion this "correction" in gas prices which "leaped" in 2008 was the shot that was heard around the world and this combined with loose credit is what got us in the situation we are in now. I say that because when gas prices went up, did we quit spending as a country? No. Many people kept eating out every day. People kept going out on the weekends. Some people such as me, a home builder, already had construction projects under way and we were bound to contract to finish them no matter how far a drive it was to the jobsite every day. People who had jobs 60 miles and even 100 miles from home and commuting every day DID NOT have a choice to quit either, but to continue to drive their vehicles, sometimes gas guzzlers, to work. Out of habit, people continued to spend and to go, and since many of them were putting an extra $40 to $120 worth of gas into their vehicles every week and it was so easy to pay for supper with a credit card, this is what they were doing. Too much credit. I myself had over $40,000 worth of credit limits. I spent almost $18,000 for gas in 2008, which is over $8,000 not budgeted for when i priced the jobs and makes Bush tax credit of $800 which was supposed to stimulate the economy at the end of the year look like a piece of bubble gum out of a Kiwanis club bubble gum machine. That $8,000 should have went back into the economy and it did not. It went into the oil companies pocket, which in my opinion did not get back into the economy, and in my opinion was a big waste. Tell me, did the cost of making oil really more than double in less than a year? No, it was ALL PROFIT.
Now I am going to have to go soon because I've finished my pancakes and I'll need to get to work, not to go to a construction job, but to figure out why I don't have any hot water so my working wife and myself can get a shower and she can get to work. I mean, after all, with the housing market crash, I've been out of work for over 3 months. Ironically I signed a contract to build a new house three months ago, but it is taking it's sweet time at the bank because of tighter banking regulation on the pre-approved loan, the time frame a knee jerk reaction to an "over-correction" in the economy resulting in a serious correction in the bank lending industry. Maybe next week the loan will close and I can once again start contributing to my family and the economy, but for now it's pancakes, fixing a shower, and writing a blog.
Where'd the money go? Some quick unscientific math. Get the census numbers and do the math yourself.
According to statistics the United States is the third largest country in the world with over 300 million people living here. This is only beat by two countries, China and India, both having a population of over 1 billion. Those are facts. Now, this is where I (or someone) should do more research: Let's assume 1/2 of the 300 million are old enough to drive. Let's assume that when gas jumped up they spent an extra $40 per week on gas.
Pre-gas rise prices for 500 miles per week average comparison from $1.25 per gallon to $3.25 per gallon.
vehicle at 12 miles per gallon - 500 divided by 12 = 41.67 gallons per week x $1.25 gallon = $52 per week
vehicle at 25 miles per gallon - 500 divided by 25 = 20 gallons per week x $1.25 gallon = $25 per week
Now lets jump the gas prices suddenly up to $3.25 per gallon:
vehicle at 12 miles per gallon - 500 divided by 12 = 41.67 gallons per week x $3.25 gallon = $169 per week
vehicle at 25 miles per gallon - 500 divided by 25 = 20 gallons per week x $3.25 gallon = $65 per week
Let's take the average between the gas guzzler and the gas saver and then multiply that times the number of people (again, this is an assumption) driving in the united states:
($169+$65) divided by 2 = $117 per week extra out of people's pay checks. Personally I believe 500 miles a week is about right because about everyone I know put at least one take of gas in their vehicle every week at 400 miles per tank, and also quite a few people go twice that because of commuting to their job, but let's cut it back to $100 extra dollars a week going to the oil companies (because it didn't go to the gas stations, according to friends I know that own gas stations it put them in a bind because they still made exactly the same per gallon but had to spend extra money in the front end, sometimes on credit, to fill their tanks up with the more expensive gas).
So assuming 150 million people spend an extra $100 per week on gas before the market collapse we can multiply 150,000,000 x $100 which equals $15,000,000,000. That's 15 BILLION dollars per average week not going into our economy multiplied to 52 weeks - $780,000,000,000. That's 780 BILLION dollars in one years time that DID NOT go into our people's pockets and back into the economy. My proposal is that a fraction of that, went on credit cards. People maxed out their credit cards and there were NOT ENOUGH regulations on credit card companies and even banks, some charging $40 a month for late payments and even loan shark interest rates of 30%. People found themselves in a awkward position. Without all the credit cards, people would have "corrected" themselves and their budgets sooner, after all, some of the commuters couldn't even afford to drive to work. Possibly, they were the first to start defaulting after quiting their jobs, or they tried it for a while putting extra expenses on credit cards before realizing the boat was sinking.
Where did 780 billion dollars go? Overseas? How much of that money stayed here to help our economy? Did the cost of overhead in the oil industry really more than DOUBLE in less than a years time. ABSOLUTELY NOT. Maybe it went to the over paid CEO's, board members, bribed politicians, etc who are now purchasing all the homes that have been foreclosed on so they can now rent them out and turn the United States into a Section 8 rental country. Did a sudden increase in gas prices during the Bush administration help destroy our economy and affect the entire world. ABSOLUTELY.
So, what can we do about it? I believe the oil industry got greedy personally but since oil is a traded commodity we can't say that 100% and also the oil market is also controlled by who? Come on, that's not hard to answer if you do a little research, but also keep in mind that MONOPOLIES also play a part in this. I mean, how many oil companies out there are there to begin with? Not many. I believe when things crashed at the end of the Bush Administration "someone" saw the mistake that was made and tried to help correct it because WHAT HAPPENED? Gas prices went way down as President Obama went into office although gas prices have since been slowly going up since that time. Had gas prices remained high we'd all be seriously boating in the swamps without a paddle amongst the alligators and crocodiles.
Again, what can we do about it:
1. Quickly inflated gas prices - Something that affect our economy so drastically, the pricing should be controlled tighter
2. Habitual spending - Time - An adjustment period. We're all adjusting now, but just a little too late
3. Over spending - Our government should quickly take a lesson we've all had to learn. Stop it. Balance the the dang checkbook like the rest of us. Government should quit borrowing money to get by. We had to, and they should see and understand what happened to us and use that example to get rid of the deficit before it's too late.
4. Loose credit regulations and too much credit - This has been overly corrected in order to make up for past mistakes
5. Bank Forclosures - New policies in place to allow people to stay in their houses so that we all don't become a nation of renters instead of owners. The rich get richer and the poor get poorer? Understand what I am saying?
6. Poor National Leadership - Wake up call. Quit electing weak minded self serving people to leadership positions.
7. Monopolies - A subject for another day, my one vice to true capitalism.
There are many points in this article that I wrote this morning, but one point I want to make very clear and if you are reading this and you are in the know and and in a position or about to be in a position to fix things, please do answer these questions:
1) Who in government dropped the ball 2) who saw the mistake and picked up the ball? 3) Who is protecting the ball, and who is protecting the guy who is protecting the ball? and 4) who is watching the ball and the guy who is protecting the guy who is holding the ball and making sure they are not a crook?
1) Who in government dropped the ball 2) who saw the mistake and picked up the ball? 3) Who is protecting the ball, and who is protecting the guy who is protecting the ball? and 4) who is watching the ball and the guy who is protecting the guy who is holding the ball and making sure they are not a crook?
I have strong capitalist views, but my only fault with true capitalism (at this point in my life) is 1) monopolies controlling markets and having too much power can drastically affect our economy and if something goes wrong and they fold then we're seriously in trouble 2) what I call "fixed costs" increasing at an alarming rate which ARE BASIC ESSENTIALS such as gas, power bill, water bill, sewer bill, other utility bills and lastly insurance costs and land tax costs. I believe in capitalism, but these "essentials" have to be "capped", controlled and regulated as well as the banking industry.
Now, SERIOUSLY, Mr. Government. Regulate these industries asap instead of just printing more dollars which could make the United States loose it's reputation as a world leader, increase inflation at a substantial rate hurting this country even more, and also encourage other countries to listen to China and the World Bank and drop the Dollar entirely for a more stable form of unified standard such as the recent World Bank's recommendation of going back to a Gold standard. Do not allow gas prices to go back up (even though they already are, make them go back down). I realize they need to go up, but it should have been a gradual thing and they went up too quickly and now we're now in a crisis. Ease off the gas prices so we'll all have more money again to start spending again and help encourage the minimum wage workers to keep their job because fixed costs such as utility bills and gas to get to work doesn't cost them more than their paycheck, so that they aren't encouraged to just "give up" and get on welfare or unemployment which puts more of a strain on our national deficit and the working people struggling to get through this ailing economy.
Now, SERIOUSLY, Mr. Government. Regulate these industries asap instead of just printing more dollars which could make the United States loose it's reputation as a world leader, increase inflation at a substantial rate hurting this country even more, and also encourage other countries to listen to China and the World Bank and drop the Dollar entirely for a more stable form of unified standard such as the recent World Bank's recommendation of going back to a Gold standard. Do not allow gas prices to go back up (even though they already are, make them go back down). I realize they need to go up, but it should have been a gradual thing and they went up too quickly and now we're now in a crisis. Ease off the gas prices so we'll all have more money again to start spending again and help encourage the minimum wage workers to keep their job because fixed costs such as utility bills and gas to get to work doesn't cost them more than their paycheck, so that they aren't encouraged to just "give up" and get on welfare or unemployment which puts more of a strain on our national deficit and the working people struggling to get through this ailing economy.
Mr. Government. Please get this ball rolling, so the economy will recover and more of us can get more work so we can help contribute some cash to that struggling fat and failing oil industry. I am sorry about the sarcasm, but our country to bleeding right now, so Mr. Government, fix the wounds.
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