Credit Crunch Redux

I was reading an article in the Wall Street Journal yesterday that said delinquent mortgages would double in 2009. This, coupled with the fact that unemployment appears to be on the upswing (it was reported on CNBC yesterday that Bank of America alone is likely to lay off 30,000 employees) doesn't bode well for an economic recovery anytime soon.

What continues to puzzle me is the level of consuming that still is evident. Reportedly, Black Friday produced much better than expected sales, for example. I've heard the comment that during the great Depression people waited in soup lines. But during our current Great Recession, people are waiting in line for iPhones.

Are we deluding ourselves by shopping thinking that the current recession is only a Wall Street issue? I mean, after all, isn't it our President who encouraged us to shop after 9/11 occurred?

We are such a culture of consumers. There are a whole generation of people who have never been alive during a prolonged recession and who have made it a way of life to to live a lifestyle far beyond their means made possible by consumer credit.

What will it take for people to change their ways? Are they able to change their ways?

Unfortunately, habits tend to be difficult to change. Typically it takes something drastic to happen in order for us to change our ways. I suspect that drastic action will be job loss.

Job losses are projected to be pretty brutal during 2009. And few people will have that rainy day fund to get them through that time. And they will be unable to turn to maxed out, cut off credit to survive. Their friend the credit card, which provided them an abundance of "stuff" and entertainment during the past decade will be nowhere to be found. They will be having their own personal credit crunch. That will be the hardest lesson of all.

Maybe it's good we are getting back to basics.

The Big Three - Round Two

I just heard on the news this morning that the CEOs of the Big Three automakers have submitted their plans to Congress as to how they will use our hard earned $25 billion in government money.

I had to laugh at their first trip to Congress. I thought to myself if I, as a business owner, had approached a bank for a loan for my business without any kind of plan as to how the loan would be used and whether and when I would be able to pay the bank back, I'd be laughed out of the bank. I mean, if this is any indication of these CEOs business acumen, we should all be very afraid of lending them our money.

I understand that this time around there will be no dramatic flying in on corporate jets. Reportedly, the CEO of Ford has decided to forgo the corporate jet this time around and drive to Washington in a Ford Hybrid. No word on how the other two CEOs will travel to Washington, but I can guarantee you it won't be via corporate jet.

I've head stories of union concessions, paring down of product lines, CEO pay being reduced to $1 per year (I wonder if that includes bonuses?), yada, yada, yada.

However, the Big Three are burning through cash at a rate of almost $5 billion per month. If they are asking for loans in the neighborhood of $25 billion, you can do the math to figure out when they will be back to Congress again with hat in hand. At that rate, I'm afraid that any changes they are willing to make will not show the financial results quickly enough to allow this loan to do them much good.

This Thursday is when the Big Three CEOs are scheduled to testify before Congress again. Fasten your seatbelts because it is sure to be a bumpy ride.