Laid Off? Now What Do You Do?
By Stephen Bucaro
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.