Tough Economic Times: If we survive we’ll be stronger

It’s a case of survival of the fittest

The 2009 financial crisis is not like the audible crash of 1929. This one seeped into our awareness somewhere around the middle of 2007. That’s a long time ago but in terms of economic processes, a year and a half isn’t long. It allowed us to get used to it gradually, so gradually that we just sat there and watched it happening like we weren’t in the movie that was playing.

Not just a passing phase

Until recently, many felt it would be another passing episode. Stock markets continued to rise for a while. During the first half of 2008, the global economy outside the finance sector barely seemed to be affected, allowing commodity and oil prices to hit new heights.

In other words, a year after the credit crisis began appearing in the balance sheets of banks and financial institutions, prices were still climbing. People were still taking Installment Loans and carrying on as though there had been no change.

The new sobriety

But the problems keep getting worse. On the financial side, the sheer force of the losses and liquidity difficulties have intensified enormously, forcing governments the world around to take steps to try and keep the trouble from spreading.

Demand in the real world has plunged. Company after company, in sector after sector, report pullbacks in sales and profits. Whence the sudden plunge in demand? Why are wallets snapping shut around the world with such rapidity?

The reasons

There are many reasons. The first is psychological: People feel a personal crisis looming closer and are putting off or canceling purchases, even if their income hasn’t been affected. People are hoarding money and assets for fear of the unknown future. Rock-bottom interest rates aren’t boosting confidence either.

And income really has dropped. People have lost their jobs or suffered pay cuts. If they’re in business, their sales turnover has contracted. And when there’s no money, nonessential shopping stops.

Consumer credit has disappeared. Many people had relied on credit. Today not only can they not get fresh credit, they’re desperately trying to meet the payments on credit taken in the past.

Getting back on tack

There are some great challenges ahead. It means returning to living beyond their means, getting the mortgage back on its feet, and reestablishing a credit source – no easy tasks. Of course these are bad solutions. In time they will simply lead to more of the same kind of trouble. We did this in the recession of 2001 to 2003, thanks to the surge in home values, which were remortgaged for spending money. Now we know where that took us.

It was so good – remember?

We bought new cars with a 5% down-payment, we went on vacations using our credit cards and we splurged on consumer goods using the value of our homes as collateral.

Okay, so the system was all wrong. We simply failed to create anything substantial and we failed to turn it into a true boom. Even if you bought a Ferrari and thought you were rich, if it was financed by the bank, you weren’t rich, you’re just another irresponsible borrower who met an irresponsible lender.

Much of the frantic activity by banks and governments today is aimed at restarting the mechanisms of consumer credit, which screeched to a halt. Restoring consumer credit could, in theory, bring fast results that look good – let’s give consumers more credit, they say; demand will rise anew; economic activity will accelerate; and presto, crisis all gone.