Javelin Marketing: The Financial Crises Explained and Solved in Five Paragraphs
by admin ~ November 6th, 2008. Filed under: financial crisis.If you started eating a lot more at each meal and then added a 4th meal and 5th meal, you would soon weigh 300 pounds. And even if you stopped over eating and maintained your weight at 300 pounds, you would be at a sever risk of heart disease, arteriosclerosis, diabetes, kidney problems and a host of other maladies.
This describes the US economy. So much debt has accumulated that we now weigh 300 pounds. It won’t work for us to stop increasing the debt or have the economy stand still. We need to lose some weight. How much weight? Let’s assume that all of the people who purchased homes for 5% down needed to put a more reasonable 20% down and everything that Americans have purchased on credit required a 20% down payment. That’s how much we need to contract—to a point where people have 20% equity in everything they own.
This amounts to trillions of dollars of contraction that could take several years of shedding debt. Just as you don’t gain 300 pounds in a few weeks, we piled on this debt over the last two decades. People have lost all sense of living within their means as has the governments (federal, state and local). The math just does not work to earn $50,000 yet spend $60,000. The jig is up and it’s time for the painful crash diet.
To the extent that politicians want to make this easy will just create more problems—like telling the 300 pound person that if they just don’t gain any more weight, they will be okay. The obese person won’t be okay. They need to lose 100 pounds or more to get down to a weight that will sustain reasonable health.
What this means is–General Motors needs to fail because people cannot afford to buy more cars, Circuit City needs to go under because people have purchased more electronic junk than they can afford or need, most home builders need to go bankrupt and unemployment needs to get to 12% or more as businesses that exist based on excessive consumption no longer survive. Man, it’s painful but trying to avoid this with the government feeding us more won’t work.
Listen to this post
July 7th, 2009 at 7:51 pm
It is true that we spend more than we can afford thus increase our debts, the key to this is contentment, if we live life in a simpler manner this could never had happen, but its not to late there are lots of ways to be satisfied.
July 9th, 2009 at 5:18 pm
Hi,
You are quite right…
The cause of this crisis is because of the price of housing and that is therefore too high mortgages. So, what I feel is, this raised the crisis and let those who debt in a wrong direction and lost and the trend followed. For all this the solutions remains nothing except the prices to melt down and be adjustable so to bring the calm.
- J.
August 31st, 2009 at 7:01 pm
I fully agree about the need to put down a 20% down payment to take out a mortgage. I would even go further and call it at 25%.
However I strongly disagree with having to put down 20% on other credit purchases. I think if the purchases are minor in comparison to that of a home, people are responsible enough to pay for their purchase. Forcing a 20% down payment on each purchase will just slow down the economy more. Less people would be making purchases and the market would go stale.
November 24th, 2009 at 2:24 pm
Financial crisis occur when the supply of money is outpaced by the demand for money.This means that liquidity is quickly evaporated because available money is withdrawn from banks (called a run), forcing banks either to sell other investments to make up for the shortfall or to collapse. Really your article is awesome.Thanks for sharing.
February 19th, 2010 at 4:49 am
I bought a house in Florida as an investment in 2005. I still own the house and am taking a bath on it…however I know that at least 10 houses on my block… it is disgusting how many people bought and couldn’t afford the mortgage 6 months later… I blame the banks, they were the greedy ones…
February 24th, 2010 at 10:47 pm
I completely agree with the last paragraph, which I also find to be the most important paragraph of this write up. There needs to be the thought process of allowing companies to fail, no matter what the consequence. Yes, there may be pain in the near term, but it also flushes out the weak for the long run.
February 27th, 2010 at 9:54 pm
Yeah there is a definite catch 22 going on with this economy. On one hand you have companies going under and I agree that they need to fail, its the natural way the economy should work, but on the other hand it means people will be out of work without qualifications to do much else. It’s nice when the government tries to feed the economy and create jobs, but if they’re jobs the out of work people aren’t qualified for then it’s just useless money flowing in to the economy.
March 24th, 2010 at 4:38 am
Relying on interest rates to reduce inflation, disproportionately hits debtors and homeowners. Cutting interest rates to boost growth, disproportionately hits savers (currently many savers have negative interest rates). The impact of interest rates can be limited. For example, we are currently in a liquidity trap, which means zero interest rates are being ineffective in boosting growth. This seems to be one of the biggest problems.
June 18th, 2010 at 3:11 am
That is the perfect analogy for the US economy, and it is so true. We are living in a society where consumption is everything and people are buying a plethora of things with money that they don’t have and that the banks and credit companies keep loaning them. I think that needs to be the main thing that cuts people off. If you have a bad credit rating and aren’t making enough to support what you’re binge-buying on, you shouldn’t be able to buy it.
July 9th, 2010 at 2:38 am
I found the last paragraph really interesting regarding we need to allow some of these big companies to fail. It would be tough on a lot of people if this were to happen, but as a nation we seem to rise and become even stronger through tough times. It also brings out more competition and resiliency from companies which is a good thing in the long run for consumers.