The first step to thriving in a frightening economy is to protect yourself and your staff from the media and the Mediocre Majority. The headlines promise another Great Depression, but unemployment is around 6% rather than the 25% of the 1930s. Unless you are selling an overvalued house or seeking bank financing, what you are fighting is fear and perception, not your business.
Key Takeaways
- Filter the media coverage or turn off the TV until the panic passes.
- Unemployment during the Depression was 25%. In this downturn it is around 6%.
- The economy appears to have bottomed out almost a year ago and has been quietly rebounding since.
- Home prices in South Florida, most of California and Boston had reached levels the local median incomes could not support.
- Blame belongs to everyone: lenders, both political parties, the securities packagers and the borrowers who used their homes as ATMs.
- Unless you are selling an overvalued home or need traditional financing to expand, you are mostly battling fear and perception.
Protect Yourself and Your Staff From the Media
First, protect yourself and your staff from the influence of media and of the “Mediocre Majority.”
Either filter this crap well or turn off the TV until it’s over. You’ll be told we’re coming into the next great Depression. In reality, it seems like the economy bottomed out almost a year ago, and has been quietly rebounding, since.
This Is Not the Great Depression
During the Depression, unemployment was at 25%. Now, it’s around 6%.
What the Politicians Are Propping Up
The politicians are busy running around, trying to prop up stupid corporations who loaned money to those people who couldn’t afford to pay it back on homes that were massively overvalued.
They are trying to prop up over-inflated home values. It’s much like trying to prop up the price of “Webvan” and other dot.com, speculative-era stocks. Foolish and dangerous. In many areas, South Florida, most of California, Boston, etc., home prices had hit points that were unsustainable, given the median incomes of those areas’ populations.
In California, for instance, a huge percentage of owners were on interest-only loans, others were exploring 50-year amortizations on their loans or adjustable-rate mortgages that increased in 3 or 5 years to unaffordable levels.
Who Is to Blame
Who’s to blame? Is it the Republicans or the Democrats? Is it Wall Street or Main Street?
Well, the unfortunate truth is that it’s everyone. The Democrats forced lenders to loan money to just about anyone, who wanted to own a home, with low incomes and incomes below the “median” for any given area.
Then Fannie Mae, Freddie Mac and others packaged and sold those mortgages as securities (with little or no hope to collect the money). No one tried to regulate those securities or raise a red flag (i.e., the Republican administration).
Then, the general public started getting money so easily that they used their homes as ATMs. Committed to adjustable-rate mortgages that they couldn’t afford. Bet on home prices continuing to escalate at unsustainable rates. So, everyone’s to blame.
Where the Underlying Value Still Sits
Take no pity on the failing financial institutions. Their stockholders lost their investment and the CEOs are out on their butts.
The only possible shining light is that like the S&L bailout, there is underlying value to all of the mortgages secured by property. It may be 75% of face value (even less), but, regardless whether it’s private money (see Warren Buffet jumping WAY in on this one) or the government, there will likely be profit at the end of the rainbow. The government may spend $700 trillion and make back $900 trillion. It’s unlikely, only because, well, it is the government doing it. I guarantee you Warren Buffet and others with the deep pockets who are stepping in will make a huge profit on the deal.
How does this affect you?
Well, if you are trying to sell a $400,000 home that you thought was worth $650,000, then you are in trouble, if you expect $650,000 or have mortgages of more than $400,000.
Also, there’s a temporary “credit crunch” that means you may have trouble raising money from traditional sources for your business expansion.
Other than that you are mostly battling fear and perception.
So, don’t buy into the pundits telling you that your business should be failing. Keep growing, and turn off the TV.
You will be surrounded this fall with messages about how scary your world is.
Frequently Asked Questions
How do I keep my staff from panicking about the economy?
Protect yourself and your team from the influence of the media and the Mediocre Majority. Either filter the coverage well or turn off the TV until it passes.
Is this really the worst economy since the Great Depression?
Unemployment during the Depression was 25%. In this downturn it is around 6%, and the economy appears to have bottomed out almost a year ago and been quietly rebounding since.
Will the credit crunch stop me from expanding my school?
The credit crunch is temporary, but it does mean you may have trouble raising money for a business expansion from traditional sources. Plan around that rather than assuming your business is in trouble.
Why did home values collapse in so many markets?
In areas like South Florida, most of California and Boston, prices had reached levels the median incomes of those populations could not sustain, propped up by interest-only loans, 50-year amortizations and adjustable-rate mortgages that reset to unaffordable levels.
