Where Did the Jobs Go?
You've probably been wondering what caused this recession. You've probably heard the complex explanation, i.e. that credit defaults swaps failed to protect the banks when the market value of collateralized debt obligations crashed because of subprime mortgage defaults. But what the heck does that mean? You've probably heard the simple explanation, i.e. that business is slow so employers have to lay off workers. But DAHH we know that. Why is business slow?
In this article, I'll attempt to explain the cause of the recession in simple terms, but not so simple that it doesn't help you understand the real cause. Understand that I'm not a professional economist and part of my explanation might be considered opinion. Then in the second part of this article, I'll tell you how to survive this recession and come out of it stronger than you were when you went in.
I know how to survive a recession because, believe it or not, this is not the first recession the world has ever experienced and, since I'm old (if you're in your 50's or younger you're just a young wiper-snapper compared to me) and I have survived many recessions.
You may have heard that the recession was caused by people speculating in real estate. Many people were speculating in real estate, but most people were just buying a home to live in, not speculating. You may have heard that many people bought homes that they couldn't afford. Many people did buy homes that they couldn't afford. But most people could afford the homes they purchased, in many cases, just barely.
Many people were deep in debt and just barley keeping up with their mortgage payments. Sure, they were going even deeper in debt, but they had been doing this for years and they probably could of did it for many more years. But then the price of gas went to over $4.00 a gallon.
In order to reduce imports of oil, much of our corn crop was diverted to making alcohol for gasoline. A lot of farm land that produced wheat, rice, and soy beans was diverted to growing corn. You may not realize it, but any plastic that isn't made from oil is made from corn (a small amount of plastic is made from coal). The point is, when the price of oil goes up, the price of everything goes up.
When prices go up, it's called inflation, and the way to stop inflation is to raise interest rates. When interest rates go up, adjustable rate mortgage payments go up. All those people that were just barley keeping up with their mortgage payments, could no longer keep up. All within a short interval, tens of thousands of people defaulted on their mortgages.
When you get a mortgage from a bank, the bank doesn't keep the mortgage. Instead many mortgages are bundled together and the bundle is called called a mortgage backed security (MBS) or a collateralized debt obligation (CDO). Banks buy these securities and earn revenue by collecting the interest from them.
The banks knew the MBS's and CDO's were a good safe investment because credit rating agencies like Moody's and Standard and Poor's gave them a AAA rating. And the credit rating agencies gave them a good rating because they were mortgage backed (and mortgages rarely default) and the securities were insured against credit risk by credit defaults swaps (CDS).
Just like insurance protection, a buyer of a MBS or CDO pays premiums to the seller of the CDS and if the security covered by the CDS defaults, the buyer is paid by the seller of the CDS to cover the loss. Unfortunately, a CDS is not insurance, in fact it's purposely NOT called "insurance" because if it was called insurance, the seller of the CDS would be required to hold reserves to cover possible losses in the insured security. In other words CDO's are a scheme to bypass the reserves requirement.
Mortgage backed securities were deemed safe because the value of the underlying collateral (the homes), have always gone up in value. But this time, the mortgages were in default, and the value of the collateral was going down, and in most cases there was no down payment on the mortgage. Because of the uninsured defaults, and because the value of the collateral going down, the market value of the securities dropped substantially.
Banks are required to hold a certain amount of reserves to pay possible withdrawals by depositors. Because the value of the MBS's and CDO's held by the banks went down in value so much, the banks have to hold on to any cash they had in order to meet the reserve requirements. So the banks stop lending.
Unfortunately, our economy runs on borrowed money. If businesses can't borrow, they can't buy inventory, they can't buy equipment, they can't pay salaries. If individuals can't borrow, they can't buy cars, appliances, or homes. The economy comes to a screeching halt. Workers get laid off. Laid off workers can't spend money, so the economy slows more, more workers get laid off. Laid off workers can't spend money ... well, you get the idea.
Financial Survival After Getting Laidoff
Exactly what steps you need to take to survive financially after getting laid off depends upon your estimate of the probable length of your layoff. If you can be sure that you'll be unemployed for only a short while, then little or no financial adjustment is necessary. I pray that this will be a short recession, but I fear it may be a long one. The first step is to assess your available resources.
Assess Available Resources
Assess resources available from your employer:
• How much vacation pay have you accrued?
• Does your employer provide severance pay?
• Do you have an IRA or 401k you can tap into if necessary?
Assess resources available from the government:
• Sign up for unemployment benefits.
• Will you qualify for food stamps?
Assess your personal resources:
• How much savings do you have?
• How much credit do you have available?
• Can you count on assistance from your relatives?
If you require assistance from friends, family, or relatives, make sure that you put everything in writing as to whether the assistance is gift or a loan and if it's a loan exactly when will you pay it back. Borrowing from relatives is probably the least advisable resource to tap into because it can result in disputes.
• What assets you can sell if necessary?
• Can you earn some cash from side jobs?
If you're a skilled individual you may be able to earn some side cash by doing car repairs, computer repairs, or handyman work for your friends, neighbors or relatives. Price your service so that they get a big savings, that way you both benefit.
Create a Budget
Maybe you've never kept a formal budget before. Now is the time to start. It's probable that being unemployed will require some (temporary) adjustments in your living standard. Here are some ways to save money.
• Cut communications costs:
• cancel cable TV
• cancel broadband Internet service
• cancel extra cell phones
• Cut food costs
• eat out less
• eat less fast food
• Cut entertainment costs
• use the public library
• go hiking or camping
Become more self reliant
One way to save money and at the same time feel more in control is to become more self reliant. Here's some ways to become more self reliant.
• grow a garden
• eat more home cooked meals
• do your own car and home repairs
Your chances of surviving financially after getting laid off will greatly improve if you assess your available resources, create a budget, and become more self reliant.
What Do You Do Now?
Just because you don't have a job doesn't mean you should spend your days laying on the sofa in front of the TV snacking on junk food. There are some things you can do so that you can come out of this recession and period of employment stronger than you were when you went in.
Take care of yourself
• Take care of yourself emotionally. First of all, don't feel alone. 2.1 Million were Jobs Lost in 2008. John Lonski, chief economist at Moody's Capital Markets Group predicts that about 2.1 million U.S. jobs will be lost in 2009. The recession is not your fault.
Sure some people at your place of employment didn't get laid off (yet). That doesn't mean that they're better than you or that you're a looser. In a recession, who gets laid off and who doesn't is basically a crap shoot. You are not a looser.
• Take care of yourself physically. Stick to an exercise program. Get involved in outdoor sports. You need to be looking sharp for job interviews.
Keep up with current events, especially business news. You need to know what economic sectors and geographic areas are poised to provide opportunity. Here's some ways to keep apprised of what's going on in the economy and the job market.
• TV news, especially networks like CNBC
• Local newspaper
• Business week Web site or magazine (I prefer the magazine because the Web site has far too much clutter).
Increase your market value
Now is the time to get more education or training. You don't have to train for a specific career. Any general business or technology training will give you an advantage. Even seemingly non-related training, like art classes, will get you off the sofa and out making contacts that might result in a job.
However, in today's work force, computer skills are the most marketable. Here's a list of the most marketable computer skills to have.
• spread sheet (Excel)
• Web page design
If you can't afford classroom training, schedule an hour each day to learn from a library book. If you can't afford expensive applications like Excel or Photoshop, download one of the free open-source versions like Openoffice or GIMP.
Don't spend your days laying on the sofa in front of the TV snacking on junk food. Inactivity feeds upon itself. Being inactive will cause you become more and more lethargic and inactive. Here's a list of ways to invest your time.
• job search. I know, it seems futile to look for a job when tens of thousands of
people are being laid off each week, but you have to stay in the game.
• help others. Look for opportunities to help friends and relatives. They may return the favor, especially if they learn of a job opening.
• volunteer. Volunteering will get you off the sofa and out making contacts that might result in a job. It's not unusual for someone who starts out cleaning cages at the dog pound to end up keeping the books or managing the dog pound, and get experience that results in a high paying job at a corporation. The secret is being reliable and willing to take on responsibility.
• engage in self reliant activities, for example grow a garden, cook meals, do your own car and home repairs.
• get training
Where are the jobs hiding?
When tens of thousands of people are being laid off each week, it's hard to believe that there are any job opnings out there, but there are. Companies are always hiring to replace people who quit, got fired, or retired. But in a recession, most jobs are not posted for the general public to apply. Most job information is kept private among family and friends. So the only way to learn about these jobs is by networking.
While you're laid off might be an excellent time to seek career counseling. I feel there are three types of people, those who like to work with their hands, those who like to work with people, and those who like to work with symbols (like programmers and accountants). What type of person are you?
Start a business
As contradictory as it sounds, the worst part of a recession is the best time to start a business. During a recession, money to start a business is cheap and available. Low cost surplus and new business equipment is available. Skilled employees are plentiful and wages are reasonable.
As the economy begins to pick up, established businesses are reluctant to hire people until the economic trend is more established. This leaves clients looking for new sources. If you're interested in starting your own business, contact the Small Business Administration for guidance.
In this article you learned, in simple terms, what caused this recession and why so many people are getting laid off. You also learned what steps you need to take to survive this recession and come out of it stronger than you were when you went in. I can tell you how to survive because I'm old, and I've survived many recessions.