This fall off in car buying was despite record discounting by the auto industry, and offers of 0% financing.
Clearly, obtaining financing is not the reason people are not buying cars.
People are not buying cars because they are worried about having a job to enable them to pay back the loan.
It’s the same reason people aren’t buying houses. It’s not that you cannot get a mortgage. There are plenty of smaller banks that would be happy to lend money to buy a house these days. But who’s going to go out and buy a house in this economy? First of all, to buy a house, unless you are a first-time buyer, you have to sell your current house, but that would mean taking a huge loss. Indeed, one in five homes in America today is technically “underwater”—that is, it is worth less than the outstanding mortgage on the property. Probably another one in five are worth little more than the outstanding mortgage. No one would sell a house under either such circumstance.
The point here is that if people aren’t willing to spend money, then what good is it to give more money to banks and their shareholders, in hopes that they will start lending it? The lending business has two sides—those offering to make a loan, and those wanting to borrow. If there’s no borrower, no amount of money available for lending is going to change the fact that there will be no loans written.
Commercial lending is not that different in this regard. Companies generally borrow money to expand. You don’t need to borrow money when your business is shrinking, unless it is to try and stave off collapse. What a company does when its markets contract and its sales and earnings fall is it cuts back on production and lays off workers. It doesn’t need to borrow money to do this. Of course, if sales collapse too fast, the company could be caught owing back wages to workers. That’s true. And in that case, a company might want to borrow in order to meet its obligations, but that’s hardly the kind of loan a bank would want to make—to a dying enterprise unable to meet payroll.
Business borrows when it is expanding, because that’s a great investment. If you know that you can earn a 15% return on your investment in a period of economic growth, and you can borrow money for expanded production at 4%, that’s a great deal. It’s also a great deal for the bank, since lending to a company that is expanding is a pretty low-risk proposition. The central government wouldn’t have to press banks to lend to such companies. The banks would do it on their own.
So, with the economy still in free fall, with companies laying off American workers at a rate of over 20,000 per day, with real unemployment soaring past 18 percent—one in six American workers are now either out of work and looking for a job, out of work and giving up looking, or involuntarily working part-time—and with family wealth more than 50% eroded away, there is simply no way that Americans are going to turn around and start borrowing and spending again. And given that the American economy is 72% composed of consumer spending, there is no way that the economy is bouncing back anytime soon.
That means that the hundreds of billions of dollars that are being poured into the likes of Citibank and AIG are being completely wasted. It is simply a pointless and scandalous transfer or wealth from the American public to the shareholders of these companies—the very companies and people who caused this catastrophe in the first place.
It’s time to put a stop to this farce.
Restoring the American economy is not going to be a matter of simply jump-starting consumer spending, or even business investment. It’s going to take a long, hard, focused effort to move away from a parasitic consumer economy in which profits are largely made through speculation, and towards a real economy that actually makes things that people both here and around the world need.
The sooner this truth is recognized, the more resources the government will still have left to put into the kind of investments that can help make that happen—things like job creation, income supports, home refinancings and medical system reform that could help Americans get back on their feet. Of course, it would also be necessary to end the wars overseas and to dramatically slash military spending.
When former companies like Citicorp and AIG are history, and when former Lehman Brothers, Citibank and AIG managers, as well as most of the Pentagon Brass, are out working at civilian conservation corps camps helping to restore watersheds or replant forests, we will know that the government has finally “gotten” it.
About the author: Philadelphia journalist Dave Lindorff is a 34-year veteran, an award-winning journalist, a former New York Times contributor, a graduate of the Columbia University Graduate School of Journalism, a two-time Journalism Fulbright Scholar, and the co-author, with Barbara Olshansky, of a well-regarded book on impeachment, The Case for Impeachment. His work is available at www.thiscantbehappening.net.
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Baltimore News Network, Inc., sponsor of this web site, is a nonprofit organization and does not make political endorsements. The opinions expressed in stories posted on this web site are the authors' own.This story was published on March 5, 2009.