#221 spend, spend, spend

Is spending the only way out of recession? What kind of spending are we referring?

Spending using real money, not credit or borrowed money? How does this work when people have no job translating no income, fraught with problems?

I’m still trying to make sense that’s happening in this financial crisis.

Has man been so dishonest that greed had overtaken turning a blind eye to the future? Or callousness on the part of those leaders who think only for today and let tomorrow suffer for itself! The existential philosphy they subscribed?

Many bailouts today are for companies who relied on credit accumulating huge sums which spirals to affecting large banks. Are bailouts for plugging holes in the banking systems?

Has the era of spending on personal credit over? Will the banks reconsider the use of personal credit cards?

What are the true causes of this economic or financial blackhole? Have we not learnt from the Great Depression in the 1920s-30s? Who is responsible? The policy-makers or those who held top positions in companies or corporations?

Has greed overtaken mankind that virtually there is little or no solution to the problem?

Will a dictator like Hitler arise or war looms?

What will tomorrow bring? I shudder to think. Will there be peace? Will there be democracy? If there is democracy, what kind of democracy?

As we’ve seen the governments have to intervene with little results. Every sector of the flailing economy have been looking for the government to bring about some form of bailouts using tax-payers’ money! Why should the tax-payers bail out those scoundrel corporate leaders or directors who were paid handsomely during their tenures on the job? Will these be prosecuted for decisions made callously?

Even in China, a socialist country, the leaders were startled at the force of this financial crisis that their first bailout of several billions have little effect!

Has the world system gone bonkers? Where are we going? What are we doing? How do we salvage this financial black hole today?

Will there be a creative solution out of this financial crisis?

#212 simple understanding

CNN’s senior business correspondent Ali Velshi gave this layman’s understanding on Oprah Winfrey show:

The first step toward grasping the bailout plan is to understand how we got in this mess in the first place. Ali says it started with three basic assumptions about the American economy: homes will increase in value over time, wages will go up over time and investments in the stock market will go up over time. “Very rarely do all three not go up at the same time,” he says. “So we thought that things will be better for us financially year after year.” The banks encouraged that concept because the more the American people spend, the more money banks make.
 
…since Americans thought their finances would increase over the years, they spent as if that money was guaranteed. “We all lived a little beyond our means and then a lot beyond our means,” he says. “Now, our country, our people, our banks and our government are all heavily, heavily indebted and the money is running tight.”

…a mortgage meltdown is primarily responsible for the economic trouble. The cycle started with regular Americans who were unable to afford their mortgage interest rates. As a result, banks foreclosed their homes. Eventually, the effects of the home foreclosures reached a global scale, causing a financial collapse. “We are very powerful people, because we caused this,” Ali says. 

The other key to understanding the financial mess is understanding credit. “Let’s show you how central credit and banking is to your life,” he says. “The bank gives you a credit card, and you use that to spend money at the grocery store. But the bank also gives the grocery store money because the grocery store has to [borrow] to buy things from a supplier, let’s say the cereal factory. …The supplier [or cereal factory] needs to buy wheat or flour, so they borrow money from the bank [too].” But because of the current economic situation, banks don’t trust anyone to pay them back, Ali says. “Your credit line, if you did nothing wrong, may have been reduced by the bank just because they are scared that you might get into trouble.” 

…due to credit reduction, the cereal factory can’t buy as much wheat, and the grocery store can’t buy as much cereal. When stores or suppliers can’t afford to buy as much they used to, they can’t do as much business. Then, people get laid off. 

As a result, all the people who lost their jobs aren’t paying taxes or shopping as much, Ali says. “They’re a net drain on the financial system. They’re not contributing.” Ali says that in the first nine months of 2008, 750,000 people in the United States lost their jobs. In September 2008 alone, an incredible 159,000 jobs were lost. “This is what hurts this system,” he says. “And that’s why it affects you.”

#200 spend first pay later

‘Spend first, pay later’ — was the slogan to attract the use of credit cards.

Living on borrowed money was the vogue for the past 40 years conservatively. Instead of regarding this as debt, it was sugared as ‘credit’.

There was a time when it was regarded smart to travel first — to enjoy life first — then pay back later! Many were caught in this and eventually led some to loansharks which spiral into deeper debts and sufferings.

However in the West, this personal credit debt is now beyond control!

While it seems expedient to solve a person’s dilemma on short term but for long term, this means accumulated debts, eventually calling for personal bankruptcy when a person cannot pay up!

Does this mean the banks write-off these debts?

What does it mean for the person going on bankruptcy for short period? What does bankruptcy do to one’s reputation?

Is this one cause that has led the banks to the point of no return today?

Apparently in the US, foreclosures of small banks were common phenomenon. Many on the international scene were not aware that happened on the domestic front.

Is this financial crisis in the US the result where bigger banks are unable to resolve their crunch? Am I too simplistic? Or is there something more sinister?