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I was supposed to go to a meeting in Philadelphia last night, but the highway was a parking lot, and I decided to go home. My route took me past the Linens ‘n Things (Last 8 days! Store Closing!), the expensive furniture store (Bankruptcy Clearance! Thanks for 81 years! Store Closing!), my favourite local restaurant where last summer you couldn’t get in without a reservation, and now the parking lot is empty, and finally past Circuit City. No sign, but they filed for bankruptcy Monday.
The economic problems facing our country, and the world, are not only massive, but are occurring in a world situation that is brand new.
Take that expensive furniture store. When it opened, the owners made furniture, and sold it. When business grew, they hired more people to make furniture, and they paid them as the pieces were finished, and then they sold the piece. Many of their pieces were done on spec, where the buyer would put down a deposit, and pay the remainder when the piece was done. Over time, they expanded to more store locations, and began borrowing money to fund the expansion. They ceased making furniture, and instead ordered it from manufacturers in North Carolina, and later from there and from overseas.
The largest portion of the sales for most furniture stores come from people buying new houses, moving into new rentals, and people building additions to their homes. (Commercial furniture is, of course, a different model.) Fewer home sales, less HELOC money, less furniture sold. Gone after 81 years.
The question becomes, at what point within the interconnected downward spiral would intervention best serve the needs of the general economy? The automotive industry employs something like 10% of the country’s population, but for a lot of people, it doesn’t matter as they will only buy Japanese cars. Would that change if Detroit could make cars that rivaled the Prius, the Fit, the Camry, the Versa, and other fuel-efficient, reliable vehicles?
Citibank announced that they are considering a moratorium on foreclosures, to give themselves time to cut deals with homeowners. If other banks follow suit, will keeping people in their homes with better mortgage terms matter if there are no jobs?
States and local governments are hiring more workers, even in the face of falling tax receipts (property, sales, income). Will that growth be sustainable, especially where public pensions are concerned?
I know the answer I prefer, but it is only one girl's opinion. I like the idea of using a WPA-like program as seed money to generate new businesses, new jobs, increased spending, and a revival of our economy. I like the Keynesian approach. If it were my choice, I'd start with infrastructure projects (roads, bridges, tunnels, schools) which would generate the need for businesses to produce asphalt, concrete, steel, wood, and green solutions.
But that's just me: what is your approach?
My corollary question is: credit got us into this mess. This specific meltdown would not have been possible in an all-cash environment. Will people change? It's a mind set that says "I need it now." The idea that there is no progress without economic growth. Will people go back to HELOCs to fund granite counter tops, or save up for the delayed gratification of paying cash a few years later?
It will be interesting to watch as things unfold. The analogy is this: man has a heart attack, and his choices are eat healthier, quit smoking, quit drinking, exercise -OR- live as he has been living, with the addition of 7 drugs a day.
We've already had the heart attack.
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