Cycle or Reset

March 31, 2009

Everything goes in cycles. It always does. The economy always goes up and down. Recessions come and go. We always get through them. But what about today’s recession/depression? Is it the same or different? Many smart people are saying that this time its different. People are saying that this will be a permanent reset to our economy, and not just the usual cycle. And it makes sense if you trace the history of how we got where we are today.

Here’s the short version. It would make a great movie. It involves power and greed. Our economy has been based on easy credit. We got used to the practically free money the banks were giving in loans, credit cards, mortgages, etc. Our savings rate was less than 0% in this country. We were surviving on credit. And the banks didn’t really care, because they would package up all those loans and sell them to Wall Street who would then repackage them and sell them on the global market. It was fueled by greed and allowed to proceed because of lack of regulation. There is no one person or group to blame. It started with people doing no-doc (liar) loans with the banks as complicit partners. The banks allowed it because they were being pressured from Wall Street for more loan packages.

In the end, it created an unsustainable bubble. There was no way it could continue. So when it finally came crashing down, it didn’t just go through a regular cycle. And it didn’t affect just the U.S. It created a global financial crisis. The downside is that we are going to realize that things need to reset back to where they should be. Banks have been deleveraging since last year. The credit crunch turned into a credit freeze for most banks. People’s credit lines have been slashed. People are having to learn to live within their means. With credit maxed out, many people are reverting to a cash and carry system. You can only spend what you have. The people who are slow to come to terms with this reset are the people who will be in the worst situation.

In our business, we have been telling people for months about the banks and the credit crunch. Unfortunately, many people are still in denial and think they are still living in 2006. The strategy for this year is to stop and reassess your situation and to start planning and preparing for when the market rebounds. There will be more regulation. The banks’ criteria for getting money will be more difficult. So make no mistake, this is not your usual economic cycle. Expect the economy to reset to a lower level than what you may be used to. It won’t be forever. Things will get better. But this year, everyone needs to face reality. Be positive. Don’t let it get you down. The one good thing I see coming from this crisis is that people are beginning to talk about things like virute and family and the more important things in life. When times are tough, people and families come together. Maybe its an American trait, I don’t know. But we will all get through this year. And things will get better.

Written by billshuttic · Filed Under Bill's Articles, Uncategorized