Economy

  • Consumers Go On Strike

    ByHeather

    As the economy continues to sour, consumers have gone on strike. For the past few months, I have been contemplating the following economic and social trends that seem to explain why.

    • American productivity has risen almost 20% in the last decade (Source)
    • Real median income over the same period has declined (Source)
    • Executive compensation has risen astronomically (Source)
    • Consumer debt has risen substantially (Source)
    • Consumer spending comprises 70% of GDP

    Rising productivity is what enables companies to increase employee’s pay. Increases in pay result in the overall rise in our standard of living. However, in the last decade, this relationship between productivity and rising employee pay seems to have been fractured.

  • Simple Financial Recovery Plan

    ByHeather

    My new favorite podcast is Planet Money. As the economic turmoil has progressed from frightening to surreal, the NPR crew at Planet Money have done a wonderful job explaining the intricacies of the complex financial world in terms that are easy to understand.

    Here is what I have been able to figure out so far. Forget about the subprime mortgage crisis. A huge part of the problem is these credit default swaps – to the tune of $55 trillion dollars. These “insurance policies” were not only taken out by people who lent money to protect themselves against potential loss. Financial gamblers were also taking out credit default swaps on other people’s loans! This is raw gambling. Some analysts estimate that for every CDF taken out to by a lender to protect a loan, ten other CDFs were sold by and for third parties on the same loan.

  • On the Financial Meltdown

    ByHeather

    As they say on Wait, Wait, Don’t Tell Me, “and now for some quotes from this week’s news.”

    First, a delightful blog I discovered called The Big Picture by Barry L. Ritholtz. In a post titled The Underlying Basis of Finance and Credit, Mr Ritholtz observes:

    Over the entire history of human finance, the underlying premise of all credit transactions — loans, mortgages, and all debt instrument — has been the borrower’s ability to repay.

    Except for [the 5 year period from 2002 to 2007] the entire history of human finance was rather reasonable about the basis for making loans in general, and extending mortgage loans in particular.

    For 99.9996% of the last 1.2 million years, loans were granted primarily on the condition of whether or not the lender believed that the borrower could repay. Between 2002 and 2007 this condition was dropped.