The Economy

It is a popular perception that the economic meltdown began with sub-prime mortgages. Though I am not sure how much truth is there in that statement. In my opinion, the problem began when we all started buying homes we could not afford - sub-prime, teaser rates, ARMs, etc. Now one may ask why does it matter? Why split hair now? Well, for two reasons - firstly, if we understand the causes, we may (just may) be able to make sure that it is not repeated in the future. And secondly, we must understand that we are all responsible for causing this crisis. We - the home owners/buyers wanted to get as big a house as we could without worrying about the future. And the greed on Wall Street (of course, taking responsibility for our actions does not reduce the role of Wall Street.

Now, that we are here...
The impact of of housing meltdown on the broader economy did not become obvious until the holidays last year, when consumer spending was substantially curtailed. And then the downward spiral begins. If we buy less, manufacturers have to make less. If they make less, they need fewer people to do the job. That means lay-offs. And then people have less money, because they have been laid off, they buy less and so on. The circle goes around and around.

The Fix.
President Obama's stimulus package (if and when passed) will help. Public works projects always help in that they create jobs. The problem is that it may take longer to materialize due to the nature of these projects. I think we need a short-term solution in the meantime. That solution needs to be something that will give a jumpstart to consumer spending. One way that I can think of is consumer rebates. But with a twist. Instead of the government sending us all rebate checks (as done last year), they should send the money in a pre-paid card with a MC/VISA logo. This would ensure that the money is spent only and not saved or used to pay existing bills. This would have a shorter-term impact while the longer-term projects are up and running.

Are we at the bottom yet?
No. I think we will hit the bottom in Q2-Q3 time frame - late summer-early fall. That assumes no other unforeseen events occur (e.g. natural disaster). I also believe that the uptick we see will be so tiny - if you blink, you miss it. But that will be the beginning of the end. The actual recovery in terms of its impact on consumers will not happen until 2010. In the meantime, tighten the seat belts, it is going to be a rough ride.

And just one more point. Do I think there will be waste in this package? You bet. But we have to start somewhere and improve as we go. Also, I think the onus is on us - the citizens - to be alert about wasteful spending and keep our representatives and government agencies (at all levels) on their toes. After all, as Lincoln said, the government is of the people, for the people, by the people.