The Worst is Yet to Come
There is a scene in the movie Jurassic Park where skeptical scientists are about to take their first ride through the dinosaur-inhabited theme park. Back in the control room, the park's skeptical chief engineer (played by Samuel L. Jackson) watches events unfold on a monitor, leans back in his chair and mutters under his breath, "Hold on to your butts."
A similar sentiment is expressed in five Foreign Policy essays by economists who correctly predicted the current global financial meltdown. They warn us that "The Worst is Yet to Come" (the title of the collection) and that we had better buckle up for a long, rough ride.
What can we expect? In the U.S., a recession for at least the next 24 months, maybe longer. This in turn will have a ripple effect that may drive the global economy into a downward spiral of recession that will be the worst in 75 years. Because of the complex interweaving of the global economy, the economists predict that no country will escape unscathed.
We are starting to see the effects of economic freefall here in the U.S. Normally, I receive maybe one unsolicited resume a month from educators fishing for an adjunct teaching position at Marylhurst University. But starting around Thanksgiving, I've been receiving on average, one inquiry a day. Even the students applying to the business degree programs, which usually include a small share of career-changers and right-sizers, has grown to include some pretty impressively credentialed professionals looking to reposition themselves for a changing and increasingly competitive job market.
So is there a light at the end of the tunnel? Even the experts can’t answer that with certainty. According to the five economists, it is going to take a complex, internationally coordinated, unorthodox approach. Needless to say, it is not going to be easy. David M. Smick, editor of The International Economy magazine and one of the five experts cited in the article, suggests that the potential solution lies in the untapped financial reserves being held in money market funds and other places. According to Smick, “It’s simply sitting on the sidelines, including $6 trillion in global money market funds alone.”
The world’s leaders, including one newly elected U.S. President, have a huge task ahead of them. If we reframe the challenge in a more positive light, we could call this a terrific opportunity to excel. We wish them Godspeed. In the meantime, hold on to your butts.
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Using Home Loans to help
As a student in the Humans Studies Department at Marylhurst University, the economic crisis has been a major topic in most of my classes over the past couple months. However, as the economy seems to be a common topic lately, one of my professors sparked a very interesting discussion the other day when he alleged that he knew how to fix the economy. He feels a majority of the solution is grounded in the extension of home and car loans, and as I am no economist, his ideas appear to be very sensible.
To summarize his thoughts, if the government forced banks to allow the large scale refinancing of home and car loans, it would create two factors to help alleviate the economic situation. Firstly, if homeowners and car owners were given the ability to extend the payback period on their loans, it would cut their payments greatly, allowing them to stay in their in their homes and continue to use there vehicles. Secondly, as loan extensions would provide homeowners with extra funds to spend each month, it would help pump money back into the economy.
In example, there are roughly nine million homeowners that could benefit from refinancing their home loans, according to CNN. If, on average, these homeowners saved a thousand dollars a month from refinancing, it could potentially put 9 billion dollars back into the economy every month.
Increased leverage to counter the unwinding of too much leverage
I cannot imagine a worse solution than increased consumer debt for an economic situation exacerbated, at least in part, by too much debt-to-equity triggered by falling housing prices. I do agree, however, that extending credit to ventures likely to create wealth, especially small business, needs to happen.
While some have pointed to the large amount of funds 'sitting idle' in money markets and elsewhere, one must remember that this capital is still working and still available to lend. The problem is the unwillingness to do so in the face of risk. Just as a bubble is fueled by irrational exuberance, a collapse is heightened by its fear-fueled opposite. Uncertainty equals risk that quenches entrepreneurial forays.
What is needed is a stable environment where capital is available to appropriate borrowers who will turn around and multiply it through business ventures.
That seems, thanks be, to be beginning. Let's not throw more uncertainty into the mix.
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