Economic Summary of 2008

As the world begins the year 2009, everyone is probably wondering whether or not the economy will collapse further. Has the ripple effect reached the edge of the lake yet, or is this only the beginning of a economic fire that will burn down the entire forest?

In looking specifically at the United States economy, I would say that further readjustment is required specifically in the credit markets. Tightening credit on consumers, such as you and I, is understandable. But tightening credit on business, especially industries that have high upkeep costs, is essential. How is a factory that has suffered the economic storm of 2008 going to recover if it cannot borrow enough money to pay its workers, run its machines, or buy equipment?

The housing crisis, a crisis that could be avoided by being practical about home equity values and the absence of sub-prime lending, has cost banks so much that they are now withdrawing loans to those that need it the most such as small business owners with good credit scores. The very definition of sub-prime is “that which is less than standard”, or in our case lending to those with a less than safe record on borrowing. Lending to those who have defaulted in the past, lending to those that have no record of credit, etc.

Much of this lending was predatory, where the lenders had full knowledge of the loan recipient’s ignorance of the terms of the loan. This led to exorbitant fees and hidden terms and conditions for the recipients, and a fat paycheck for those who stooped so low as to engage in the sale of these loans. To make things worse, these predatory lenders, who traditionally preyed on the weak (those with very poor credit scores) were making a killing on those with good credit scores.

This, like all bad things, had to come to an end. Eventually, so many people were defaulting on these loans and many lenders went bankrupt, but don’t feel too sorry for them, their management managed to save a few golden parachutes. That was not the end of it, because these lenders happened to be on the stock market and up until the meltdown thier financial reports looked very good, attracting the attention and the investments of large hedge funds and individual investors alike.

Once the meltdown happened, a ripple effect occured and in the end trillions of dollars evaporated from the public. Those most banks most involved with the sub-prime loans or stakeholders of other banks that were received a major blow, and those small banks that involved themselves in over-zealous sub-prime mortgage lending went out of business.

All the coverage of this by the news industry caused a slowdown in spending, and that had a ripple effect on the car industry and others. This holdiday season was slow, and the only light at the end of the tunnel is lower gas prices, a light that is dimming down.