Thursday, February 07, 2008

Feeling the Pinch

As you may or may not be are aware of, I was for the most part absent from writing in the month of December. The multiple reasons were all around the fact that I had recently been laid off from my [now] prior place of employment. But with new work comes new vigor to continue my op-ed work.

To be laid off is to be given a biased outlook on any reports that come out of the economic indicators from the Fed to ADP to the U.S. Treasury. If you have been checking in with Paul Krugman or the Economic Policy Institute, you are no doubt preparing bomb shelters and stocking up on large amounts of spam and yacht batteries.

However, as I mentioned, I have found work again. Maybe this is because my financial economic and accounting background lends itself to other industries other than housing. One would like to think that while the amount of lay offs has increased, the amount of people finding new jobs will not drop. However, for those in the housing industry whose jobs are specific (e.g. construction) the wait will depend on the housing market itself.

Why Krugman’s outlook is so gloomy is in the deduction that the consumer market in the U.S. revolves around our citizen-homeowner’s credit/equity lines. So, if the housing market starts to suffer, consumers will not spend as much and producers will have not have to make as much. Therefore, producers will lay workers off because they do not need them.

It’s funny when you think about it. Most modern liberal economists (you can include me if you would like) scoff at the idea of “trickle-down” theory. However, doom and gloom scenarios seem to always base themselves around a trickle-down path.

This brings us to another point, which is that there is a difference between those two trickle-down theories. When a right leaning economist talks about trickle down, usually they refer to the fact that if people spend money, mostly rich people, everyone in the economy will be rewarded, while left leaning economists shudder to think that making rich people happier is a virtue.

Instead, left leaning economists will probably write more about income gaps and the bad events that happen on the supply side of the market. What we don’t realize when we are reading this is that in some sense it is a “trickle down” explanation. But how do these items trickle down? Well, in our recent economic downturn, the amount of equity those homeowners had decreased when it was found that their assets (homes) were overvalued. Kind of like when you realize that your used Hyundai doesn’t have the exact same resale value as a Honda or, better yet, BMW. Well, once the prices fell, and the equity left, that did a few things.

First, loan defaults, then market write downs (write-offs), and finally market psychology. The loan defaults force those who defaulted to reign in their spending. However, that is not everyone in the U.S.; therefore the demand effect is pretty small on that note. Next came the market write-downs that banks and mortgage brokers made, which then affected the securities and funds that those loans were bundled under. When the losses start being reported to Wall Street, all those little people you see running around on CNBC go into “super freak-out” mode. When that happens, the entire market’s psychology is affected, and then you start to get a hit on consumer demand because most everyone’s asset value in the stock market goes down affecting the equity they have.

So, in the end, it’s all trickle down, and in the end, I lost my job too.

(By the way, I know some of you are going to grill me on how there is more to the loan defaults than just the simple fact that there are defaults. Let me tell you that I know this, but that is an entirely separate column. In fact, go look at Robert Samuelson, or Paul Krugman, because they have written plenty on how those loans were securitized and somewhat disguised under “AAA” status.)

Moreover, in the end, don’t let names like “Reagonomics,” “supply-side economics,” or “Voodoo economics” cloud your vision. To every economic story, there is a degree of supply and demand affecting each other, as well as the underlying prices and interest rates that affect behavior (demand) and the prices themselves.
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