Browse Tag: crisis

Economy Surefire Fix Recipe (continued)

Part 2. Click for part 1.

Now would be a good time to ask me where is the fix? All I’ve been talking about so far is why we are in the mess we are in

From the entrepreneurial perspective – we have ineffective management. It’s everywhere. Not only the government suffers from this – major companies are settling for ridiculous levels of idiocy in their decisions. Probably because that’s what pays the most – immediately. In the long run, however, it’s not all that bright and shiny.

The big three automakers can’t get it into their system that people buy American trucks simply because people need them and there’s little to no alternative to them. And people buy Japanese cars because people want them – for higher efficiency and reliability for the same (if not lower) price . Out of the curiosity and nostalgia I always rent a different American car when I cannot travel in my own car. So far the experience is next to horrible. These cars have less sex appeal than President Bush and are less comfortable than a torture chair. I’ve been through Pontiacs, Fords, Chryslers and Chevrolets, varying among cars, SUVs, vans and trucks.

The outsourcing of high-tech jobs, R&D and pretty much anything where you have to use your brains damages the overall state of economy. I closely work with people who either manage outsourced teams or do clean ups after outsourcing’s epic failures. For every story about successfully outsourced project I hear two about failed ones. From the short-range-profit point of view the outsourcing is great, but when you take longer terms into consideration – outsourcing is less effective and costs just as much if not more. There’s a reason why business owners prefer working with people locally, and that is – easiness of communication, staying in touch and fast resolution of issues, which in the long run costs less than just cheap execution. Talking to someone, who’s English is a second or third language and who’s only incentive is to work for as long as they can so they can suck all the money they can will hardly yield anything useful. Besides, this is just handing our own competitive advantage to our competitors on the silver plate with a golden rim. And we are even paying for that!

So all that we need to do is create more jobs in the country. More people in the country will make money (and more people will be making more money than they are now), so the blood of the economy will start circulating again. This is not a short term solution, nor it would benefit all people at once overnight. But it’s surely a way to go.

If lawmakers, instead of passing a bailout (which reminds me of the old saying that you can’t heal a dead with a poultice) should concentrate more on having a law that will reward (with tax breaks maybe?) companies that create and maintain jobs in USA and punish those that dump them overseas. From my perspective – it’s a matter of language of the law how it’s done, as long as it’s done.

Economy Surefire Fix Recipe

Economy Fix, picture courtesy of money.cnn.com Part 1. Click here for part 2.

Obviously I am not an expert on our current economy situation. However, as a small business owner I feel the pain of crisis and, as any other entrepreneur, is anxious to offer my own fix on the situation. Here it goes.

First, let me introduce a little example. For last two weeks there’s a full-size truck standing in front of the Battery Park. They sell some shoes that, supposedly, could not be found in stores. For the first week the line was long. By the end of the second week the line shortened threefold. There were couple of people in line when I checked on Friday. This morning – that’s almost third week over – there was no line at all. In fact, there was, apparently, a surplus of sales people over clients. This, if anyone missed their Economics 101, is market saturation. When you sold your product to everyone who was ready, willing and able to buy it.

Now, what happened to the mortgages is that they were sold to everyone who were ready, willing and able. Of course, the market was fluctuating, but not out of proportion. It was saturated. Then some geniuses read some marketing books and decided that they need to create a new market. This coincided with high-paying jobs being outsourced and people’s incomes going down. Or, maybe, there were no geniuses and no reading. Just someone noticed that same people who were buying houses, like the well-paid IT guys, can’t afford houses anymore, because they don’t get those big salaries, because of some starving Indian guy in poor Bangalore who claimed he could work for food and shelter.

And some real estate guy went to some mortgage specialist friend or something like that happened. And we got mortgages for the poor, when guys who make $50K a year could buy a $500K house in sunny California or in prestigious neighbourhood of Brooklyn, Manhattan or Jersey City.

This idea bombed. Obviously, there are far more guys who make $50K then those who make $250K. Even more, the average guy (or gal – it’s irrelevant to the story) who makes around $50K is much more guillible, than one who makes five times more. I know, because I’ve been there too.

So what happened next?

Demand for houses (and, therefore, mortgages) skyrocketed so high that banks didn’t know where to get so much money. So they started selling those weird papers, repackaged deals and did other smart things (see CDS, derivatives) to come up with money and profits for themselves. I am not saying it’s bad to turn a profit. I am saying that the average $50K Joe can only live off his credit cards for so long. After they’re maxed out, he has to either stop eating or move out. Hence the foreclosures became the hot topic, once more and more $50K Joes got sucked into the buying houses from same $50K Joes who got into the same whirpool a little earlier. Imagine a huge crowd, rushing and squeezing into wide open, but very narrow doors. Once the members of the crowd successfully squeezed in, the fast stream carries them into the watershed and spills them into oblivion. That’s pretty much how the system worked.

Since all these guys had problems giving back the money they’ve borrowed on one hand and demand for more credit from clients on the other hand, banks were under a continuous stress of producing more and more money so that the public can keep borrowing. That’s when it hit really hard.

Now, same guys who were fast tracked through the whirlpool and those who didn’t are splitting the bill for the fun ride. The only thing that sort of bothers me is that guys who get paid $20 million for 2 month of work (see WaMu) wouldn’t have a problem with their part of the payment. In fact – they wouldn’t even notice it.

Part 2 – keep reading!