So, there are advantages of working in an office full of economists, we tend to understand financial matters a little bit. I’m not claiming that I know, or understand, the economy, because it’s a complicated beast. I do, however, know enough through my research and through my work that some things have to be made clear.
1. The bailout affects YOU! The typical, and understandable, response that I have heard from most people is why should I save corporate America? I don’t get anything out of this bill. No, someone is not going to hand you a check and bail you out of your bad decisions, but I mean no offense when I say that if you fail, your neighbors won’t go under. If a bank fails, thousands of people have the possibility of losing out. Sure, the FDIC protects your deposits (up to $100,000) but picture this: Your car has a massive engine failure and the mechanic laughs at you when you ask about fixing it and tells you it would be cheaper just to get a new car, this one has died and it will never run correctly again. You go car shopping, find a moderately priced used car, but don’t qualify for financing because the bank does not have any money. Huh? Why doesn’t the bank have any money? Because they took your money when you deposited it, and they invested that money so they could in turn offer you that spiffy little interest rate on your savings account. Bank’s don’t just give you interest on your accounts because they can, that money has to come from somewhere. Normally that investment is in the form of giving loans to people, specifically high dollar loans over a long period of time with interest rates that will net the bank, and your savings account, some money. Do we see where this is going? Banks offer mortgages as a way of generating interest income, which benefits you. Because of this terrible mess that banks are in, they can’t meet their obligations at the end of the week, or the end of the month, hence failure. And in the long run, if banks keep having liquidity issues due to bad lines of credit, it will be virtually impossible to get credit, so that means no car loan. The bailout will give the banking system liquidity in which smaller banks can borrow from bigger banks on a regular basis, allowing them to meet their obligations without fear that Bob down the street isn’t going to pay his loan payment this month, and allows them to issue more loans in the hope they can make a little bit of money in order to give you a little bit of money for your car.
2. Do you work for a big corporation? It doesn’t even have to be big, it could be a smaller corporation that does a lot of business, but it doesn’t do a lot business in the here and now, it closes contracts at the end of the month instead of weekly, or biweekly. The problem with that? You like to get paid. You like to get paid on a regular basis, usually biweekly. Meaning unless they have huge reserves in the bank, which most companies do not, they have to borrow from the bank to make payroll. This isn’t normally a problem, in fact it’s a usual, normal occurrence. Enter the liquidity issue: Banks have no money to give to companies to make payroll for the pay period, so you don’t get a paycheck. It doesn’t mean your company’s business has dropped off, they could be doing more business than normal, it just means that they don’t have that money now. We don’t normally work for free, so if this continues, something has to give, and typically people have to quit in order to find more stable employment, meaning your company fails even though it’s doing great business.
These are only two situations in which everyday people are affected. I’m sure there are hundreds more that could be derived. The simple truth of the matter is that the economy is a very difficult, strange thing. It’s rather difficult to understand all its ends and outs, I don’t claim to, but what you need to realize is that we are all connected when it comes to the US economy. The bad decision someone else makes can affect you in some situations, and this is one. The time for laying blame has passed, we know exactly why there is a problem, the time for action before it is too late has come, and is on the verge of passing. This is one instance where we are going to have to suck it up and take the hit, else things could get worse, and even I don’t want to think about that.
