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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!

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business

Daily Reading

Reading Trends from my Google Reader - Small Business and Web Design Blog

This is the reading trends of my Google Reader. As you can see I haven’t been reading much lately. But January is usually a very bad month for web traffic. Sales are low. Additionally, everyone is worrying about the upcoming recession, feds acting on it and so on and so forth. So people post a lot less, too.

This, however, brings up one important aspect. With pessimistic outlook on economy and less and less disposable money – will Americans start more businesses or less? Would they sit on the money waiting to spend – or take a risk of investing inĀ  hot areas while others wait and loose? Hard to say at this point as panic is still upon us and stock market.