In a recession, pain always leads to wisdom
June 13, 2008 · Updated 4:59 PM
By Bill Pirkle, The Pirkle Report
We are entering some bad economic times.
Simply put, home loans were made to people who did not have the resources to pay and could only afford the home when the payments were made low for a period of time by charging interest rates that were below the prime rate and thus were called sub-prime loans.
When the grace period expired and the payments reflected the normal home loan rate, the home buyers payments doubled and tripled, and the borrowers defaulted, flooding the market with foreclosed homes.
The lenders had earlier bundled these loans and sold the bundles to big investment bankers to get more money to lend. As the foreclosures continued, these bundles began to lose value as did the bonds that these bundles backed up. Banks like Bear Sterns who aggressively bought these bundles of paper found themselves in trouble. Soon, credit began to dry up as banks became very conservative in their lending and a credit crunch developed.
Now we are entering what might be a very bad recession. People losing their jobs will cause even more foreclosures.
Something similar to this happened before in the 1920s. Then, people were buying stock in what became a popular frenzy of stock market investing. Ordinary people like waitresses were buying stock. This worked because you could buy stock with no money down and use the value of the stock itself as collateral for the loan to buy the stock. As the value of the stock fell, so did the collateral for the loan, and banks found themselves in trouble as many people defaulted on the loans. Whats a waitress to do?
This eventually led to the crash of 1929 and the resulting Great Depression.
But there are more similarities between the decade of the 1920s and this decade besides economics. Called the Roaring 20s, it was a decade of excess. Sex was liberated as women began to smoke and drink. The women became flappers and a new provocative dance, the Charleston, became the rage. People indulged in illegal drugs (alcohol was illegal at that time) and few cared that they were breaking the law. Youth was rebellious. Parents were confused by it all. Many were thinking, What is happening to America?
If this sounds familiar, it should because this is happening today. Sex is liberated, drugs are everywhere and youth is rebellious. And many people are asking, What is happening to America?
Indeed, we have both an economic parallel and a social parallel. Both are characterized by bad judgment or thinking that occurs when long-established principles are thrown out the window and replaced by the notion of immediate gratification. Immediate gratification is certainly more fun than adhering to a long list of principles that include sacrifice and hard work.
But not to worry because a correcting mechanism is in place that will restore sensibility. This mechanism is called pain. Its a simple process that has worked throughout history. When you abandon long-established principles, you will make foolish decisions. This will result in many problems in your life. You will suffer pain. This pain will cause introspection. You will begin to ask yourself, How did I get into this mess? There is no introspective thinking when you are having fun.
The result of this introspective thinking is wisdom. This is the wisdom that was absent when the long-established principles were abandoned. This is often called newfound wisdom.
With this wisdom, people correct their foolish behavior and things begin to get better, albeit slowly.
Eventually, things get back to normal and the pain disappears.
In that respect, pain is not only a good thing; it is a necessary thing. Therefore, it should be allowed to take place. Everybody is wiser after a recession.
The problem is that people in pain often blame not themselves, but the leadership for their problems. The leadership goes by the name of government. Thus, we see people blaming the government for their state in life rather than blaming their own foolish thinking. Realizing that this will happen and realizing that these suffering people will tend to want to replace the government (throw the rascals out), the government stands ready to abate the pain.
This always takes the form of money or handouts, as they are called. Thus in May, we are all going to get a check from the government. This is on top of welfare payments, rent subsidies, extended unemployment insurance, food stamps and the rest from the nanny state. Imagine that we import Mexicans to do jobs that Americans wont do while at the same time paying these same Americans unemployment payments. What is wrong with this picture?
So pain is on the way, but the good news is, so is wisdom. The pain can be abated by the government as long as the money does not run out, and the money will not run out because we are adding all these costs to the national debt and our grandchildren can worry about it.
What this excess government spending does is lower the value of the dollar. The dollar is now becoming worthless, so people are investing in gold, and the price of gold is soaring.
There is no mystery as to what is happening. Our economists understand the process completely. But so do the economists around the world, including the economist of our adversaries like China, the Middle East and Russia.
The peoples of the world are asking, What is happening to America? Many Americans are asking, Who do you think will make it to the playoffs? and Who do you think will win American Idol?
Federal Way resident Bill Pirkle can be reached at firstname.lastname@example.org.