Some of the stories I’ve heard in support of the idea that we all need to be really, really scared:
NPR: The owner of a pet store is afraid she will not be able to borrow much money, so she will not be able to stock as much inventory as usual for Christmas. Without borrowing money, she will only be able to afford to pay five employees, so she will have to work 12-hour days and watch her expenses carefully. She has noticed that some customers, instead of buying a bag of dog food and a toy, are only buying the dog food.
So, she has to buy inventory using the store’s actual earnings, stock only what she can sell, pay her employees from actual store revenue, and keep track of expenses. Excuse me, but this is how a business is supposed to be run! Obviously, though, dogs are going to suffer the most from the credit crunch.
NPR: The owner of seven car dealerships is afraid he will not be able to borrow enough money to buy as many cars from the manufacturers. This will hurt the manufacturers, because they won’t get as many orders. He will probably keep fewer cars on the lot because he is not sure they will sell. More customers seem to be getting turned down for loans, and so people are being more careful about how much money they are spending, and they are choosing less expensive, more economical cars. Loan companies are also requiring him to sign agreements stating that if the customer defaults, he will have to pay the loan company up to $2700. Used car sales are doing much better than new car sales.
A car dealer’s worst nightmare is for customers to start thinking about what they can afford and not spending more than that. The second worst thing is for people to buy economical cars, because it’s harder to upsell them when they are focused on price and gas mileage. To top it off, the loan companies insist on holding the dealer responsible for determining the customer’s actual creditworthiness (no more “Crazy Al doesn’t care if you have bad credit!”) and for only selling the customer what they can afford. Since most of the dealer’s profit margin comes from the fake distinction between “new” and “slightly used,” the loan companies are not willing to eat the depreciation cost if the dealer is lazy about evaluating the customer’s creditworthiness. None of this makes me feel sorry for the dealer.
NPR: A single mother bought a house a few years ago with a loan having a 5% interest rate. At the time, the payment was well within her budget. However, it was an adjustable rate mortgage, and now the rate has gone up to 7.5%, and the payment has increased as well. She isn’t sure she will be able to continue making the payments.
I feel sorry for the woman if she didn’t understand the ARM, and if she can’t get the lender to refinance or at least negotiate new terms. However, my own subprime loan is at 10.00%. Until her interest rate gets closer to mine, I don’t feel sorry for her budget problems.
CNN: A car dealer is concerned that not as many people will be able to buy new cars, because they will not be able to get loans.
That’s too bad for the car manufacturers and their employees. However, most people don’t need a new car every two years, and the main reason for the pervasiveness of that superstition is the greed of the car manufacturers and their employees. My car is 16 years old and works just fine. I would rather pay a couple hundred dollars to my mechanic every six months than pay $2000-3000 dollars a year to a loan company.
I’m probably not typical as far as my house and car. However, the bottom line is that this situation is mostly a crisis for spoiled, overpaid, credit-addicted social climbers. I live in one of the wealthiest counties in the US, and I see them every day. I know some of them, and they’re generally nice people.
However, their financial problems just don’t sound very compelling to me, or to many other “subprime” wage-earners. Lou Barnes expressed a similar opinion:
Over last weekend another force erupted all over the country: native, grassroots rage at a bailout that would leave all the big institutions in place — officers, directors, stockholders, all — and offer to taxpayers the absurd promise of payback from hundreds of billions of trash that the institutions couldn’t unload on anyone else.
You tell me your precious markets will melt down without this? Why do I care? Your stock market can go to goddamn zero on Monday, and then you can come down here with me to find out how it feels not to be able pay the bills. More than half of Americans have no stake in these markets, no savings at all; and there is a political price to be paid for extreme inequality of income.
This bailout, incomprehensible to civilians and many experts and senators, should have taken ownership in the institutions involved. Proper vetting to Congress months ago would have gotten that done. Instead, the same ancient American forces that ignited the Palin phenomenon, Jefferson-Jackson-Bryan-LaFollette populism, have mobilized an anti-bank, anti-smarty-pants, street-level riot not seen in modern times.
[“Bailout incites ‘grassroots rage,’“ Inman News]
BBC: An editor for the Wall Street Journal answers a reporter’s question about how the recently passed Senate bailout bill would help ordinary Americans. First, he says, the FDIC coverage limit would be raised from $100,000 to $250,000. This, he says, would directly impact ordinary Americans.
Yeah, right. Another elitist moron speaks for “ordinary Americans.”
The editor goes on to state that the bill will loosen up credit markets, so that small businesses that depend on credit markets will be able to get loans that they need in order to operate.
Again, if the business needs a loan in order to operate, it is already a failing business. Loans should only be used to capitalize expansion.
Aside from that, no one has yet shown that they know for sure (1) why credit markets are currently tight and (2) whether this bill’s provisions would change that. It is possible that credit is tight because the financiers are waiting for the federal government to pay them above-market rates for their worthless derivatives. It is also possible that “damage” to the financial system is so extensive already that the bailout will have no effect on the broader economy, and will merely guarantee short-term profits to the financiers.