Credit Crisis Solution

The Silver Lining:

The current financial crisis creates a lot of uncertainty in the economy, continually challenging consumer confidence, and encouraging companies into panic mode, exacerbating the situation.

The media is constantly covering the sour side of the situation, making it hard to find the silver lining. Austrian economist Joseph Schumpeter used the term “creative destruction” to describe the idea that with destruction comes innovation, leading to a sustainable economy. The American spirit, lowered barriers to entry, and readiness of the unemployed creates an opportunity seen once a century.

There is no doubt that this period will be hard on many, but keep your heads up high and lets create America 2.0. Once the smoke clears we will see the silver lining:

Habit (the opportunity to simplify ones life)

Habits are expensive and addicting, and American’s have created detrimental habits over the last century unseen in other nations.

1) There has been a significant increase in house size and cost over the last century. Moyak.com estimates the average house was 700 to 1,200 square feet at the beginning of the 19th century, increasing to 1,000 square feet in 1950, and topping 2,000 square feet in 2000. Costs in 1900 were about $5,000, $11,000 in 1950 and $200,000 recently. The change in consumer habits factored heavily into the housing boom. With the collapse we have the opportunity to simplify our lives.

2) Much like the idea of large houses is the idea of big and/or powerful autos. SUV’s and muscle cars were the bread and butter of the Big 3 automakers for a while, and have now transformed into some of their biggest challenges. AAA estimated the average cost per mile (2003 and gas at $1.46/gallon) for each class of car were: 55.3 cents a mile for a compact car, 62.1 cents for a midsize car, 62.1 for a midsize SUV, and 75.2 cents a mile for a full-size. If you look at consumer auto trends in Europe, higher gas prices have created a sustainable plethora of small cars. With the uncertain energy prices going forward, we have the opportunity to continue to revert to the basics.

3) The increase in consumer trends listed above and the readily available credit has lead to a worrisome trend in consumer debt spending. Efinancedirectory.com indicated: “1989 the average amount of credit card debt per household was $2,768. By 2004, that number had increased 89 percent to $5,219. Flat wages, rising costs, and material desires have all helped to contribute to the rapid increase.” Additionally, about 43% of Americans’ spend beyond their means, the average household credit card debit is approximately $8,000, and personal bankruptcies have doubled in the past decade. Hopefully we’ll take a queue from our friendly neighbors to the north, and begin to save.

4) Time is money and there has been a disturbing trend in America. Under all administrations since Truman, America has forsworn a reduction in working hours, a trend converse to all other industrialized nations. The implications are arguable, but apparent and negative, and now is a great opportunity to find out what’s really important.

5) This one may be a little bit of a reach, but we also have an opportunity to confront the obesity epidemic. If we’re striving for higher quality of life and cost reduction, this can be a prime and central focal point. According to a 2000 report by the U.S. Surgeon General, the direct and indirect costs of obesity are $117 billion each year.

Market and Political opportunities

1) In the early 19th century the traditional family had a provider and parent, one worker sustained the economic needs whole family. Give rise to feminist movement, and changes in spending habits, and you have a paradigm shift where both parents work. Today, there is a need for two wage earners, as indicated above, there is a debt epidemic in this country, but more discouraging is the idea that for nine out of 10 workers, inflation outpaced wages. The top priority of the fed is stability, economic growth and tamed inflation. This presents an opportunity for wage reform.

2) Similar to the concern listed above, there has been a disproportionate and increasing dispersion of wealth. CNN.com cites from economists Emmanuel Saez and Thomas Piketty that showed that “in 2004, the top 1 percent of earners –a group that includes many chief executives –received 11.2 percent of all wage income, up from 8.7 percent a decade earlier and less than 6 percent three decades ago.” This is a disturbing trend and with the imbalance of power and prevalence of greed, reform can create the needed changes, especially because these figures represent wages and not passive investment income.

3) I.O.U.SA is a documentary created by the Concord Coalition, on American trends and unsustainable unfunded liabilities of the US (medicade/medicare and social security), as well as the national debt trends.

4) Al Gore has been a blessing in popularizing climate change, and Obama has been a strong advocate of Clean Technology. The potential benefits of legislation promoting these causes are paramount for both economic and political stability.

5) Similar to the ideas of Clean Technology and climate change are the ideas of infrastructure and health care; however, like most American’s, I only know the systems are flawed. With the economic smoke screen, it would be impractical for the government not to address them.

“Creative Destruction”, no system is ever perfect but, when the opportunity presents itself, it is unwise not to take advantage. Most these opportunities are mutually exclusive and I will be utterly surprised if we are not a better nation in a decade. This list is still open, if you have any other additions, please email or comment. Please note, the current situation presents many threats as well, refer to unintended consequences for further information.