Ed's a smart guy. He's also got a degree in finance, just finished three years with an investment bank on Wall Street, and owns a natural curiosity that spurns him to read and learn about things he's interested in: namely, elk hunting and finance. I'm no dummy either, but from an early age I've had an aversion to anything political, government or business related. Which, I see now, has put me at a mighty disadvantage to live and function in the world as an adult. With a big deal election coming up and the economy in an unprecedented state of chaos, I'm trying to catch up.
Two of my three siblings have expressed to me harsh distaste for political blogging (not that I could or would anyway), so, at the risk of making an idiot of myself, I go straight to finance.
Over the last three years my economic knowledge and understanding have increased through long discussions with Ed, so I have had a much better context for current events that I otherwise would. And with all that has been happening lately, and the addition of seeing Ed more often, our discussions have become longer and more frequent. Sometimes he emails me articles during the day and we discuss them at night. Sometimes I catch a financial blurb on public radio while running errands and - oh, rare but exciting joy of joys - get to tell him something he didn't know. Through our discussions I've gained a little confidence, enough to occasionally posit a thoughtful question or propose an idea or connection. (Of course they are usually things he has already thought of but he is very patient with me and gives me the praise I require for using my brain.)
So, no, I don't have any surprise economic analysis to share, and I wouldn't presume to be able to teach readers something new. The national and global economies are complex and I'm still learning. But I can share a few things that have been helpful to me.
There are three main parts to the current economic situation:
The Past, or how we got here. This article from 1999 about Fannie Mae's acceptance of subprime loans gives a brief but haunting report and prediction. The author, Steven Holmes, has every right now to say, "I told you so." It suggests political pressures to get everyone the American dream of home ownership, whether they can afford it or not, as one of the causes. But this Seeking Alpha article, The Great Consumer Crash of 2009, has been the most helpful to me so far, in laying out in charts and brief numbered points how the hell it got so bad. And what's happening now as a result. My favorite quote, "Only when the tide goes out do you discover who's been swimming naked."
Conclusion: Americans have been allowed to live on too much credit, and that can't go on forever. Eventually you have to pay the piper.
The Present, or what's happening now. Again, The Great Consumer Crash article does a good job explaining this, though it's just one man's take, and certainly too simple to include everything. But it's a good start. Ed says it's a more pessimistic view than many analysts are willing to admit yet, but I think more and more are coming to that side every day. No one wants to cause panic, but I'd like to know, expect, and plan for the worst, personally. Last night Ed and I sat in our living room and listened to an hour-long BBC radio broadcast debate, "World economy on the brink?" We felt like we were back in the olden days, sitting by the fire listening to radio programs to learn what's happening in the world. But despite jargon I had to have Ed explain later, like leverage, recapitalization and contra-cyclical, it was well done and helpful. Ken in Hong Kong was especially insightful if only the moderator wouldn't have interrupted him so much. At one point they were discussing "who's to blame" for how we got here, and I was surprised that all blame was laid on the government and the banks. Not a single panel member mentioned the individuals living grossly beyond their means to be at fault. I wonder if the economy can ever stabilize until people become responsible and accountable again for their own finances, and learn to live and save within their means.
Conclusion: It's bad. No one knows what will happen next, or exactly how many of the wheels in motion will play out. In the least, several waves of ripple effects are still expected.
The Future, or how we can recover. Of course the President's bailout plan is on the table. Ed did a good job explaining this to me in terms of the savings & loan scandals in the late 80's and early 90's, of which I was completely oblivious. It worked then, but the scale now is monstrously grander. Everyone has an opinion - again the BBC radio show addresses this - but the reality is that the situation is unprecedented. A bailout could work or not work. The economy could swing back or fall deeper. Whatever happens, America is facing a recovery phase, and we have already dropped out as the global economic power we once were - Asia is king now, though I don't know exactly what that means. I asked Ed what the chances are of falling into another Great Depression and he pointed out that there are things in place, like the FDIC, that are supposed to keep that from ever happening again. But they are being tested, and will be tested further, and we can only hope they will hold up. Unemployment is at about 6.1%; during the Depression it was 25%. But life back then was more rural, and people found ways to survive. With our current two-income, commuter workforce society, it's hard to say what will happen if more people continue to lose jobs, lose health insurance, and lose homes.
Howard Marks is chairman of Oaktree, a large money management firm. He frequently writes memos about financial things as he sees them to Oaktree employees and clients, and those memos often get forwarded and passed around Wall Street and financial people. His views are insightful and well-respected. His most recent memo, dated Wednesday, explains the bailout, and it's worth reading.
Conclusion: If we haven't already, start tightening the belt. Lose the consumer mentality, cut expenses, save some money. Live within our households' means. Rough seas ahead. Words like meltdown, panic, crisis, collapse and worst ever are being thrown around.
For members of The Church of Jesus Christ of Latter-day Saints, none of this should come as a surprise. Our leaders have been telling and warning us for years, in fact decades, to live providently. And not just for kicks, but for safety and security in an unpredictable world, the world in which we now live. Elder L. Tom Perry's 1995 talk, "If Ye Are Prepared Ye Shall Not Fear," and Elder Jospeh B. Wirthlin's 2004 talk, "Earthly Debts, Heavenly Debts" are just two examples of the constant counsel we have been given, and hopefully taken.
It's a fascinating, if confusing and scary, time to be taking home-based Econ 101. But, knowledge being power, I'm trying hard to understand as much as I can so as to be a responsible citizen and steward of my family.
Got comments? Please share - I'd love to learn from you.
Got questions? Call me. I'll give the phone to Ed.