Wow, the DOW below 7000. And I'm not very surprised. I think just about everyone understands that this market isn't going to recover any time soon. And though Obama's heart is in the right place, the money alone isn't going to do anything but prolong the problem.
Our main issue right now, as it was in 1929, is confidence. Its why the DOW is going to keep dropping, quite likely to somewhere around 5500, why unemployment is going to go up, and why the GDP is going to keep going down. To explain one aspect of why confidence is important: if you as a consumer aren't confident in a products ability to do what it says it will, you don't buy it, right? Well, the same thing applies to investors buying a companies stock, or lenders lending to a company. And currently, everyone is so scared, they won't even invest in stocks that ARE good. And lenders are so scared about making a bad call, they aren't lending to anyone either. Just as a consumer will avoid cream cheese if it made him sick once, the investors and lenders are avoiding putting any money at all into companies that need it.
Fewer lenders supporting businesses means those businesses can easily become sickly and have to cut their workforce, close stores and factories, etc. And if the businesses look sickly, any investors left who believed in them bail too. Its that simple. Investors flock to cash and bonds instead (creating a bubble in the bond market, but that's another story) and lenders just don't lend.
In the meantime all us little guys get hurt as our jobs are cut, our stores are closed, and prices are raised (I think we'll see more of this later on this year.)
Obama is headed in the right direction: putting more money into social services, health care, investing in science and green technology, basically trying to get our country to believe in itself once again. He also continues to give money to banks and lenders to hoard, and tax breaks that cost the gov't billions but don't help any single person enough to make a difference. Those moves, while they are bipartisan, aren't smart. They don't do anything to create confidence in the long term, which is exactly what we need.
With confidence, lenders will lend again, investors will invest, employers will hire, and in general, people will breathe easier. Unfortunately, confidence doesn't come quick, easy or cheap. A lot of time and work will be involved, and in the meantime, the DOW will continue to slide.
Its not all doom and gloom though. As I have said before, though this is painful, its forcing us into a smaller, more sustainable standard of living; one where its not about how many toys you have, but how well you live and how fulfilled you are. That's a good thing. Its also had the side effect of encouraging Americans to save for the future and to pay off their debts, also a good thing. So yes, the economy will shrink more before it gets better, and yes, it looks dreary and upsetting, but at the core of this is a whole new life for us as Americans. One where we know the value of the word "enough," where we have confidence in our country, and one where America has an inner strength that means much more than her outer economic might used to mean.
2 comments:
On the giving of money to banks - This American Life had a really interesting segment on this. As I understand it, the major problem with some of these banks is that because of poor choices, their balances sheets no longer balance. When that happens, there is a danger that the banks will go out of business. Keeping the banks afloat is a measure designed to instill confidence in the bank. The fact that they're hoarding the money means they're working to get to and keep a balanced ledger, rather than continuing to make questionable loans. I am not sure it's a stupid move. If citibank or bank of america were to go under, for example, a lot of individuals would be impacted. That's a lot of lost jobs, and their failure would yet again undermine consumer confidence.
If there's something about this I don't know, that makes it stupid, I'd like to know about it, though. I am still trying to understand a lot of what's going on these days.
Great point Sarah. I ended up writing another blog entry to answer it, since I'm so longwinded. ;)
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