Monday, June 30, 2008

Wall Street, Main Street Crises Explained

What is going on with the economy is at the same time very simple, enormously complex and a matter of your political point of view. This helps explain why the news media in general -- and the financial media in particular -- has done such a lousy job of explaining the ongoing crises on Wall Street and Main Street.

Although it is slightly dated and written from a journalist's perspective, this explanation in the May-June issue of Columbia Journalism Review lays out the foundations of the crisis in clear terms.

Here's my summary of the explanation:
There is a credit crisis of very broad potential damage. People were given mortgages who didn't quality and that has created a domino effect because bad mortgages were packaged with good mortgages and a wide range of financial institutions bought these packages in the form of securities that were used as collateral for other borrowing.

Borrowing is what has supported the economy in the past, but because incomes haven't been rising people, businesses and government are borrowing more and debt has become the fulcrum of the economy. Despite having moderately strong economic growth, the only profits are being made by big corporations.

The conventional economic wisdom that you need a better education because jobs are becoming more sophisticated isn't holding water because college-educated people aren't doing that well.

There is no hesitation on the part of businesses to fire people or keep wages down. Serious wage increases are considered inflationary, and the minimum wages wasn't raised for many years -- signs that the federal government isn't paying attention.

The global economy has some effect on the crises, but the U.S. is not necessarily losing the better-paying jobs, or even the middle-income jobs, due to trade. Globalization has made it easier to overlook and excuse the deterioration in business norms and government norms. People are hurting and recognize they need government programs to solve problems that business cannot solve. But again, they federal government isn't paying attention.
Got that?

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