2008-10-31 - 1:54 p.m.
DBB Solves the Economic Crisis
So I was supposed to be on Letterman tonight, but I had to rush back to DC to solve this economic crisis (rimshot).
I am not an economist. I think I have taken 12 credits of economics in my life, though, which probably qualifies me to run the Fed. These were:
Microeconomics (butt easy)
Before I tell people how to solve this problem, I have a few words about the subprime mortgage fiasco. First you have to understand that the way that banks like to make money off of loans is via interest. They loan you money, you pay it back incrementally plus a percent. This is easy for them. Banks don’t like it when people default on their loans because then they don’t get paid. Throughout history, social do-gooders have gotten upset that poor people have a hard time getting loans.* If I was a bank, I wouldn’t want to give loans to poor people either because they are less likely to pay the money back. And frankly, as a bank, I’d much rather have your money than foreclose on a house. Cause that’s just a pain in the ass.** Somehow people think that everyone should be able to afford a house. Here’s a news flash: in many housing markets you shouldn’t. I make well above the median national salary and I cannot afford a house. But I’m OK with that. Sub-prime mortgages were a horrible idea because not only did they allow families to buy their first 2 bedroom house, but it also allowed people to buy way more house than they could afford. I do not feel badly for the people who are having their homes foreclosed at all, because they are stupid and must be punished. However, the banks gambled on this business model (also a bad idea) so they share the blame.
One of the Catch 22’s of the economy is that when you lose consumer/investor confidence there is a huge negative feedback loop, because if no one is spending/investing money, the economy gets worse, confidence declines, the economy gets worse and pretty soon you are jealous that your neighbor has a refrigerator box to live in because you only have a stove box and it’s a little cramped.
People need to not panic.
For example, one of my friend’s girlfriends is not going to Mexico with our whole crew for Lobster’s wedding, because she “feels bad spending money when the economy is so bad.” I love this girl to death, but that is retarded.
Justifiable reasons you can panic and/or not spend money:
1) If you are scheduled to retire in the next 10 years. Yeah, sorry about that.
2) If you get a significant portion of your income from stock dividends. Again, sorry about that.
3) If you are out of a job, or have concrete data that you will be soon out of a job.
Otherwise, please go about your business as usual. Spend money within your means just as you normally do. Hell, you may want to even consider spending an extra 10% on everyone’s Christmas presents this year. The economy could use the jump start.
People are freaking out about their retirement savings, but unless you aren’t diversified well enough, you’ll be fine. Yes, the market is down. But guess what? Your monthly investment that used to buy 10 shares, now buys 100 shares. So when the market rebounds (and it always rebounds) you will make your money back pretty quickly. So keep investing what you always invest. Hell, if you can, invest a little more.
As consumer spending, increases, confidence will increase, investing will increase and everything will return to normal.
Problem solved. I’m off to get drunk.
*Part of what my dad does for a living is keeping track of the statistics of who his bank lends money to, so that when they are accused of discriminatory lending practices they can demonstrate that they refused to give people loans because they were poor, not because they were black or Hispanic.
**I know this because one of my dad’s previous jobs at the bank was being in charge of “Properties Acquired” which was code for “he sold foreclosed houses.” One perk of this when I was a kid is that if when people left their homes without cleaning all their shit out of it, he could take whatever he wanted. I definitely score a crappy set of golf clubs (which I still have), a crappy 10 speed and a crappy video game system.