Posted by: Bill | February 10, 2009

More Economics Rambling…errr….Discussion

I have calmed down a bit since this post about the stimulus. I had an interesting discussion with part of my team of economic advisers a few nights ago that mostly centered around the stimulus. I do my best to summarize below.

  1. How much would you pay to end this? By this, I mean the general uncertainty and fear of a return to the 1930’s (or some derivation thereof). If you are okay with $3,000, that is about what the stimulus will cost per person in the U.S. If you tack on TARP1 and the TARP2 (coming soon), that number is much higher. For the sake of argument, let’s say it’s $10K. Our group agreed we would happily write such a check to end the uncertainty if we were able. Of course, TARPs 1 through N + Stimuli 1 through N are not a guarantee because nobody really knows what they are doing…which puts us back at square one.
  2. How do you feel about government assistance so that all qualified individuals would be eligible for 4.0% mortgages? This scares me because our government has been rigging things for many years to encourage home ownership and that didn’t turn out so well. That being said, I would be near the front of the line for a 4.0% mortgage.
  3. Psychologically, would it help if you saw your colleagues, friends, family start to relax and spend somewhat more freely again? Would an uptick in the stock markets help? This is part of the argument for the stimulus. The government is doing something and they must be smarter than me. Personally, I don’t think this would do much for me, but I can see how it might help others.
  4. Principles of Economics, rap version – This was not part of our discussion, but it’s fantastic and I think it should be distributed to high schools across the country.
  5. A proposal from Greg Mankiw – I like his ideas, but I think this is a political pipedream.
  6. Article by Steven Pearlstein – Nicely written and very level-headed. This helped me calm down about the stimulus in general.

I will leave you with these immortal words from Rhythm, Rhyme, Results:

Demand Supply, Demand Supply
Learn this and you’ll know why
We work, We buy, We work, We buy
You know the price is right when the competition’s alive

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Responses

  1. Bill, I have been thinking about this quite a bit….who hasn’t? We started our new financial strategy last year, before any of the collapse and just as the bad housing news was coming in. The strategy is to become debt free, aside from a reasonable mortgage and operate our lives as a cash business. The sale of our house and move west did not help the situation, but I digress. I wonder how many other Americans are considering the same thing? The greed and overall negligence has been going on with housing and consumer credit for years. The pundits have been saying for years that we overspend and live beyond our means. The government sets no example and there is almost a complete lack of finance education in the school system other than balancing a check book and whipping up a simple budget.

    If the stock market recovered tomorrow and unemployment plummeted to 3% I would not start spending money. I would not buy a new car. We’ll stay on plan regardless. The result will be a cut in personal spending. I wonder how many other people are starting to think about their habits and how much interest they pay on an average year? How many people are cracking down because, if they did lose their job, they would not be able to cover their debt payments?

  2. I agree with you on running the house as a cash-based operation. We have been that way for awhile with, like you said, a mortgage and the occasional vehicle. We had been saving extra cash for a future vehicle purchase as well to reduce (or possibly eliminate) the need to finance a car as well. I also think that many Americans will follow the same path you described…at least for awhile. The majority will likely revert to previous habits eventually. How long that takes probably depends on how painful this recession becomes. The more painful, the longer it will take to return to business as usual.

    About two months ago, The Atlantic had a great article about the nature of bubbles from an investment perspective and why it will happen again. If you are interested, let me know and I’ll dig up the URL (it’s free online). You might be able to find it yourself too.

    I don’t want to eliminate all possibilities of using credit though. If you think about it, there are times that paying a little interest is not so bad. If I borrow say 20K to buy a car at 6.5%, that’s not a bad deal so long as I think that I can make more than 6.5% a year on that money if I invest it. Until the market turns around though, cash all the way!

  3. Bill, I think you are correct, people will revert to borrowing. It’s the extent and circumstances I’m worried about. If you have the 20k and would rather invest it, that works. If you don’t, you probably shouldn’t be buying a 20k car. I guess we’ll see if people will adopt that attitude long term.


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