Black Market Economics

Yes, you know where this is going: the War on Drugs. I almost titled this piece "War on Drugs: Enriching the Criminal", but that just seemed too long. Indeed, today's article is about how the government has given the criminals of the world an even more profitable enterprise than racketeering or prostitution.

First off let me assure you that, although I am a college student with shaggy hair, I am not a drug user. I can confidently say that I would pass any screening that could be thrown at me. I do, however, believe in adults having control over their own bodies and what goes into them. In fact, this may be a good time to note that if I were to choose a political party to associate with it would be the Libertarians. Please don't let this alienate you, I just believe in small government, free markets, and total personal freedoms. But I digress...

Drugs, love them or hate them, have been around (and in use) for many centuries, even millennia depending on who you listen to. Jefferson grew pot (and hemp, too) and wrote about it in his diary. Rail workers in the old West sucked on opium to get through the day. Millions and millions of people across the country are getting high as I write this. It's not just dumb kids either. There are businessmen doing coke, housewives taking speed, and your favorite entertainers doing a myriad of different stuff. Oh, and Johnny down the street is drinking a beer. Alcohol is, in fact, a drug.

So where does this diverse group of quiet druggies get their fix. Why, from their friendly local drug dealer of course! And they pay top dollar for it, too. Drug dealers make a pretty penny off of these people and do extremely minimal work. They never have to worry about marketing or writing receipts. They don't have to keep track of finances or pay taxes. The best part is that very few of them actually get caught. The profession is medium-low risk and very high return. Of course, like any group of people, some are out to make trouble. They carry guns and take advantage of people with horrible addictions. These are the dealers you see on the evening news.

Everyone wants drug dealers (and other criminals) out of the streets behind bars, so why is the War on Drugs a bad thing? Well, for one, it has strengthened the industry. It has also made it far more profitable. Organized criminals have all but given up on the classical methods of extortion, prostitution, and gambling in lieu of the more profitable drug trafficking industry.

You see, as government regulation on drugs and the people that sell them got more strict, supply went down. As you can imagine, demand did not. As we all know, as supply is reduced and demand remains constant, prices go up. Prices did rise, making traffickers all the more brazen. With the same production costs and higher wholesale prices, traffickers could actually afford to lose shipments and still turn a nice profit. This influx of new trafficking activity meant that supply actually rose above the baseline levels. The consumer, however, had assimilated to higher prices and the price level remains artificially high. So now you have an enormous flow of money changing hands, going into and out of the country, and no one is paying taxes on it. This creates an issue for the government, because that is a large amount of lost revenue. If, instead, all of these drug users were to get there fix from a bottle of vodka or scotch, the government would be raking in all kinds of money.

Another issue that the government does not like to address is that a larger proportion of the population is using drugs now than ever before. I credit government-sponsored anti-drug rhetoric for providing the dealers the marketing they need to continue to find new clientèle. I had to sit through a lot of that garbage in high school and let me tell you, half the time I was thinking "Wow, that sounds like a blast!" Additionally, I can say from my own experience (and others have agreed) that in high school it was far easier to score some pot than to get a case of beer. In fact, I could more readily get most common drugs of abuse than that case of beer. Why is this? Beer is regulated, you need a government ID stating that you are over 21 to buy it. Drugs are not regulated, anyone can buy them from anyone willing to sell them.

So, here is my solution. Many of you won't like this. Legalize it! And by "it" I don't just mean pot, but all drugs. Like I said, I believe in personal responsibility and personal freedoms. If someone chooses to do cocaine, they will get it from a drug dealer if it is not available legally. We saw this during the prohibition era; just because you make something illegal will not stop people from wanting it and there will always be someone willing to provide it.

Sell drugs at CVS and Walgreens. Make sure to check ID, though or you could be fined. All of the sudden, criminals will not have any business. The drugs you can buy in stores are regulated in strength, quality, and purity. They are produced by reputable companies. There will be a label on the box that has safe dosing instructions and a number to call if you overdid it. Most importantly, though, is that they are taxed like there is no tomorrow. Even with enormous taxes, legal avenues will easily be able to beat drug dealers in price. With these drug dealers out of business, they will be forced to get a real job and their income can be taxed, too. Now that drugs are properly regulated, kids won't have such an easy time getting their grubby little hands on them. The prison overcrowding problem will magically go away. They could even shut some down to save the government some coin. Organized crime will crumble as will it's ill effects such as drive by shootings and busted knee caps. Getting your pot will be as simple as getting your Jack Daniels and you will be a fine, tax-paying citizen.

But won't everyone start doing drugs and stealing cars? No, they won't. People are not stupid. The people that get hopped up on coke and rob a liquor store would have done that if drugs were legal or not. An everyday Joe who smokes a joint after work is less likely to start problems than his neighbor that just downed ten beers. As for the people that do get messed up and go commit a crime, treat them the same as if someone had gotten drunk and did the same thing. Charge people with crimes that effect the people around them. I fully support someone getting the book thrown at them if they drive on drugs or if they steal on drugs. But drugs are not the problem.

Stop Dropping the Interest Rate, Please

In all of it's infinite wisdom the Fed continues to drop interest rates. Did you think one percent was as low as they'll go? You're wrong. According to Mr. Bernanke, interest rates below 1% are "certainly feasible". Additionally, as of 1 December 2008, the effective fed funds rate is 0.52%.

There are many problems with this. For one, the Fed rate drops aren't positively effecting the economy. Look at each rate drop over the past six months or so. The rate dropped, the market went up for the day and then continued to spiral down the next. Dropping the rate is doing nothing but starving the federal government from interest income that it could desperately use. The low interest rate, even in combination with an astronomical bailout, is not inducing banks to lend. Unless you have a credit score above 750 and make over $100,000 a year, you're probably going to run into issues finding credit for anything. For example: A friend of mine works at a Chrysler dealership here in metro Detroit. She saw a man come in the other day returning the two cars he leased for his children. This man was a Chrysler employee for over two decades. He said that he understood that Chrysler was no longer leasing and wanted to buyout the leased vehicles. He had never missed a car payment in the twenty years he has owned or leased Chrysler vehicles, but alas, he was declined. We are talking about a man with a near perfect credit score whose income can be docked for a missed payment through Chrysler and he could not get a loan (and a small one at that). The mortgage industry is no better. If the Fed truly thinks that another quarter of a percent is really going to help, they are in need of some new management.

The second issue that I take with the persistently dropping Fed rate is a matter of creating another bubble. If the market does indeed begin to recover and rates remain low, we will quickly see an artificial credit bubble inflating. Banks will be falling over themselves to grant credit to every jackass that can fill in an application. We will return to the days when infants and family pets are being pre-approved for credit cards. Who would be stupid enough to fall back into that, you ask? The American consumer and the banks that provide the credit. It seems that no matter how bad we screw ourselves we eventually mend our wounds and ask, nay beg, for more. I mean really, did anyone at the Fed put two and two together with Greenspan's sweeping rate cuts and the housing bubble. They're running to fall into the same trap.

If you haven't figured it out yet, I do tend towards classical economics vs. Keynesian. I do have great respect for certain Keynesian concepts, however. I will concede that markets do not adjust rapidly and that monetary policy can work to our advantage. That said, I support a system of very limited monetary policy. Even a Keynesian will tell you that the market has no time to adjust if you make monetary policy changes on a weekly (OK, I'm exaggerating) basis.

Mr. Bernanke, it is time to stop. I respect you as an economist and I believe that you have done considerable positive work in the field. Hell, my current Macroeconomics textbook was coauthored by you. That said, stop. Please stop. Don't let everyone look back on your tenure and wonder how we let another Greenspan Bubble happen.

Fixing Unemployment in the Short-Run

As we all know, unemployment rates are reaching record levels. It is a dire circumstance because consumption naturally drops with employment levels. So, how do we remedy this problem? Decrease, or even eliminate, the minimum wage.

I know that this sounds crazy, but hear me out. The graph above illustrates the impact of a minimum wage on the labor market. If minimum wage is decreased, but the wage rate remains above the equilibrium, points A and B will move closer to the equilibrium rate. Point B will have little effect on the unemployment rate because many workers do not want to work below the current minimum wage. The number of unemployed workers eligible for unemployment benefits will fall, however, because these people will be forced to reject job offers below the current minimum wage or take the job anyway and thereby disqualify themselves. Point A is the primary focus. As you can see, as point A approaches market equilibrium the quantity of labor demanded increases. This very simply translates to more employed workers in the labor market. If minimum wage is eliminated, the market will reach equilibrium.

Do not fear, I haven't gone completely mad. If such a plan was implemented there are some key features that I would advocate:

• All employees currently hired under minimum wage laws have their wages protected and are protected from adverse employment effects (read: getting fired) because of their wage.
• The reduction or elimination of minimum wage is to be for a defined period of time. At the end of this time, minimum wage will be restored to current levels.
• Because of the resultant decrease in unemployment benefits paid, employers are given a nominal tax benefit for hiring new workers. This will induce hiring despite the time-limited nature of such a plan.

Are there some flaws in this plan? Yes. Do the benefits outweigh the flaws? In my opinion, you're damned right. At this point, in this economy, displaced workers are getting desperate. I, for example, am a senior student of Economics at Oakland University. Supposedly, we have one of the best economics programs in the state, better than Michigan State University. I have my Series 7 and 66 certifications and I am just finishing up my Life, Accident and Health licensing. I also do not have a job and I'm not making a dime. My savings have run out. I will most certainly take a job for $5.00 an hour even though a few months ago I was offered a job for $24,000 a year plus commissions and a full benefits package (the job never materialized). I need cash and I will work 60 hours a weeks for below minimum wage if it means being able to pay my bills. I'm not the only one either.

If the corporations are getting a greater marginal benefit from a drop in wages, you can be sure that they will be happy to eat it up. Go talk to the Big Three, they would love to drop the labor unions like a bad habit and pick up workers for six bucks an hour. No one would lose their job. Minimum wage is pricing the American worker out of their job the same way labor unions are pricing themselves out of a job.

So there you go. Unfortunately, being an economist and a businessperson does not lend very well to being a humanitarian. That said, it's much easier to protect my case when I am one of the masses at the bottom. For those of you looking for a job, I wish you good luck. If anyone knows of ANY employment opportunities in northern metro Detroit that would welcome a loon like me, feel free to drop me a line.

Someone That Knows What They're Doing

I found this posted at foodliker and thought I would share it with you. Yes, it's common sense, but at least someone in a position of power is saying it.

From Branch Banking & Trust Co.September 23, 2008

Dear Senator/Congressman/Representative:

BB&T is a $136 billion multi-state banking company. We have 1,500 branches throughout the mid-Atlantic and southeast states. While we have been impacted by the real estate markets, we continue to have healthy profitability and a strong capital position.

We think it is important that Congress hear from the well run financial institutions as most of the concerns have been focused on the problem companies. It is inappropriate that the debate is largely being shaped by the financial institutions who made very poor decisions.

Attached are the issues that we believe are relevant from the perspective of healthy banks. Your consideration of these issues is greatly appreciated.

Sincerely, John Allison

Key Points on “Rescue” Plan From A Healthy Bank’s Perspective

1. Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high.
2. There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.
3. While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.
4. Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post “rescue” punish the poorly run institutions and not punish the well run companies.
5. A significant and immediate tax credit for purchasing homes would be a far less expensive and more effective cure for the mortgage market and financial system than the proposed “rescue” plan.
6. This is a housing value crisis. It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction.
7. The guaranty of money funds by the U.S. Treasury creates enormous risk for the banking industry. Banks have been paying into the FDIC insurance fund since 1933. The fund has a limit of $100,000 per client. An arbitrary, “out of the blue” guarantee of money funds creates risk for the taxpayers and significantly distorts financial markets.
8. Protecting the banking system, which is fundamentally controlled by the Federal Reserve, is an established government function. It is completely unclear why the government needs to or should bail out insurance companies, investment banks, hedge funds and foreign companies.
9. It is extremely unclear how the government will price the problem real estate assets. Priced too low, the real estate markets will be worse off than if the bail ot did not exist. Priced too high, the taxpayers will take huge losses. Without a market price, how can you rationally determine value?
10. The proposed bankruptcy “cram down” will severely negatively impact mortgage markets and will damage well run institutions. This will provide an incentive for homeowners who are able to pay their mortgages, but have a loss in their house, to take bankruptcy and force losses on banks. (Banks would not have received the gains had the house appreciated.) This will substantially increase the risk in mortgage lending and make mortgage pricing much higher in the future.
11. Fair Value accounting should be changed immediately. It does not work when there are no market prices. If we had Fair Value accounting, as interpreted today, in the early 1990’s the United States financial system would have crashed. Accounting should not drive economic activity, it should reflect it.
12. The proposed new merger accounting rules should be deferred for at least five years. The new merger accounting rules are creating uncertainty for high quality companies who might potentially purchase weaker companies.
13. The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. The Treasury has a number of smart individuals, including Hank Paulson. However, Treasury is torally dominated by Wall Street investment bankers. They do not have knowledge of the commercial banking industry. Therefore, they can not be relied on to objectively assess all the implications of government policy on all financial intermediaries. The decision to protect the money funds is a clear example of a material lack of insight into the risk to the total financial system.
14. Arbitrary limits on executive compensation will be self defeating. With these limits, only the failing financial institutions will participate in the “rescue”, effectively making this plan a massive subsidy for incompetence. Also, how will companies attract the leadership talent to manage their business effectively with irrational compensation limits?

The American Saving Syndrome

The following is actually a term paper I wrote for an economics class that I took over this past summer. It has some interesting (at least to me) insights on American saving habits. Please excuse the length of this post.

The American Saving Syndrome
An Analysis of American Saving Patterns and Their Consequences

In recent years, the American savings rate has gone negative following many years of declining rates. This drop in savings rate may, however, be partially the result of how the rate is calculated. Calculation error or not, the decreased rate of savings in the United States is an important concern in the long run. The American saving rate, after calculation adjustments, does continue to decline; a problem which needs to be assessed further and addressed.

The savings rate officially went negative in 2005 and continued down to -1.1 percent in 2006.¹ This compared to the broad 1950-1992 average of 8.6 percent, or even the 1999-2004 average of 2.2 percent², has become a troubling figure for millions of Americans. What makes this even more concerning is that the monthly debt service payments of households has reached an all time high percentage of personal income³. The implications of the proposed calculation adjustments will be addressed first, followed by an economic analysis of what is causing the very real decline in the rate of personal savings.

The first proposed issue in the calculation of the savings rate is not, in fact, based on a calculation adjustment, but the measure itself. The most recent data used by the Bureau of Economic Analysis on the savings rate is preliminary data. Charles Steindel, in his article How Worrisome Is a Negative Savings Rate?, notes that data on the savings rate in the 1970s was up to two percent higher in the 1986 report than in the 1981 report.⁴ While this is not an entirely normal happening, the potential for this much variation could mean that we will find in five years that the savings rate was never negative in the first place.

The most visible calculation method to the public is the NIPA method. This is the most popularly reported number as a result of this calculation going negative in 2005⁵. The primary issue with this method is how it accounts for realized capital gains. While dividends are added without issue, stock repurchase gains are not included in income although the taxes paid on these gains are deducted from disposable income. Stock repurchase has grown inconceivably since from 2003 to 2006 going from a mere $42 billion to a much more substantial $602 billion.⁶ This represents an increase of $560 billion in unreported disposable income and an $84 billion reported decrease in disposable income at the 15 percent capital gains tax rate.⁷ According to Steindel, this anomaly can account for approximately one-third of the savings rate decrease between 2003 and 2006.⁸ Also, by the NIPA method, pension benefits received are not counted as personal income, but contributions to pension plans are deducted from personal disposable income. Net benefits have risen quite consistently over the past several decades and were at an all time high in 2005, the last year that was reported by the Bureau of Economic Analysis.⁹ Naturally, this also has a negative impact on the calculated savings rate.

One proposed method for a more realistic measure of saving is to combine individuals and corporations to find a gross private saving measure. By this measure, in 2006 when the NIPA personal savings rate was -1.1 percent, the gross private saving rate was approximately 13 percent of the GDP. Furthermore, while the personal savings rate has been consistently dropping for decades, the gross private saving rate has remained relatively stable over the past several years.¹⁰

Despite all of these proposed anomalies and adjustments, the personal savings rate in the United States has indeed declined over the past several years. As we have seen, the rate may not have declined as much as has been reported, but even in post-adjustment terms the rate has been slipping. This, of course, brings about the question of whether Americans are saving enough and also the potential economic implications if they are not.

It is fairly unanimous amongst economists that the current personal savings rate, while not necessarily a problem in the short-run, will become an appreciable problem in the long-run.¹¹ A component of the reduced current savings rate is the levels of energy costs rising substantially in 2005 and continuing to rise. Such a substantial and unforeseen increase in necessary expenses has understandably put a strain on the consumer. Steindel sees this issue waning as consumers increasingly move to more energy-efficient appliances and vehicles.¹² Even with this new consumerism, however, the savings rate will likely not rise by much. To answer the first question posed: No, Americans are not actively saving enough of their disposable funds.

There are serious economic implications for this lack of savings in the long-run.¹³ Consumers are one of the greatest lenders of funds in the economy. A decrease in savings by consumers relates a reduction in the supply of funds for the commercial and public sectors to borrow. It follows, then, that this reduction in supply will increase the price of borrowing funds in the form of higher interest. While the public sector is not interest-rate sensitive, businesses are the most interest-rate sensitive of all borrowers. This increased cost of borrowing to businesses will make it hard to grow business or even remain at the same level. Thereby, the economy will stagnate with sustained low levels of consumer saving.

These effects could trickle down even further back to the consumer themselves. If businesses are struggling resultant of the increased cost of borrowing, they may seek to cut costs by laying-off workers. These workers, because they have not been saving and likely have a considerable debt load, will struggle to cover even basic expenses and will likely find a substantial challenge in finding new employment. If a portion of these unemployed workers are forced to declare bankruptcy, the problems only escalate further. The credit companies, utilities, and other businesses servicing these bankrupt accounts will be forced to write off this bad debt. The bankrupted workers will find it difficult, or even impossible, to find credit in the future. The written-off debt in combination with the new lack of consumer credit will further stagnate or even depress the economy.

The above is, of course, a worst case scenario, but the result is a very real possibility. The rampant consumerism of the 1990s and early 2000s has led the public to expect a higher standard of living and many are choosing to save less and borrow more to maintain this new standard.¹⁴ Also, during these high points in our economy, individuals increased their estimates of permanent income as a result of extremely high labor productivity in the aforementioned time period. Also to blame, Massimo Guidolin and Elizabeth A. La Jeunesse argue, are financial innovations such as interest-only mortgages and subprime loans. All of these factors have synchronously combined to create our current conundrum.

Indeed, a potential savings crisis is a reality for the United States. Now that there is an understanding of how it came about and the potential implications, it is wise to find a path to reform these spending and saving habits. Increasing levels of saving isn’t hard, it merely requires a few well thought-out actions on the saver’s part. Pat Regnier, in The Call to Make America Thrifty Again, suggests that savings bonds would be a solid saving strategy.¹⁵ Although not marketed as well these days, EE and I bonds are still available for purchase. The bonds make it easier to save the money than a simple savings account, because you can see clearly the appreciable opportunity cost of turning them in early to make a luxury purchase. Further, Regnier suggests offering on tax forms the option to receive tax refunds in savings bond form.

In this authors opinion, there are even easier methods of “positive reinforcement” saving. For example, if an employer offers direct deposit, their employees may elect to have a portion of each paycheck deposited directly into a savings account while the remainder is directed to the checking account. In this fashion, the saver need not be aware of the funds going into the savings account and the balance that makes it to the checking account is spendable.

Of course, not everyone has a level of income that will allow them to uncaringly tuck away a percentage of each paycheck. This reform in savings will undoubtedly need to be accompanied in a reform in spending. It is important that the saver is tracking reductions in expenses and saving an equivalent amount. For example, cancelling an unlimited rental account at Blockbuster will save 30 dollars each month and upon this cancellation the saver should increase the portion of their paycheck being direct deposited into a savings account by the equivalent 30 dollars each month.

Americans need to relearn the art and science of thrift to avoid the economic consequences of not saving enough. It will require an adjustment in the standard of living expectations and saving habits of a generation, but in the long-run it may be the only thing that can save our fragile economy.

Works Cited

Regnier, Pat. "The Call to Make America Thrifty Again." Money Aug. 2008: 148+. Business Source Premier. EBSCO. [Library name], [City], [State abbreviation]. 14 Aug. 2008 .

Guidolin, Massimo, and Elizabeth A. La Jeunesse.. "The Decline in the U.S. Personal Saving Rate: Is It Real and Is It a Puzzle?." Review (00149187) 89.6 (Nov. 2007): 491-514. Business Source Premier. EBSCO. [Library name], [City], [State abbreviation]. 14 Aug. 2008 .

Steindel, Charles. "How Worrisome Is a Negative Saving Rate?." Current Issues in Economics & Finance 13.4 (May 2007): 1-7. Business Source Premier. EBSCO. [Library name], [City], [State abbreviation]. 14 Aug. 2008 .

Endnotes

^1,2 See Steindel, page 1

³ See Guidolin, page 491

⁴ See Steindel, pages 2 and 3; chart 2 on page 3

⁵ See Guidolin, page 494

⁶ See Steindel, page 3

⁷ These numbers were produced by the author, based upon the subtraction of 2006 numbers from 2003 numbers and taking 15 percent of the resultant number.

⁸ See Steindel, page 4

⁹ See Guidolin, page 500, Figure 6

¹⁰ See Steindel, page 4 and 5 “Broader Saving Trends”

¹¹ See Steindel, page 2

¹² See Steindel, page 3

¹³ The following is an economic analysis based on widely-accepted “stylized facts” and economic theories as interpreted by the author.

¹⁴ See Guiodlin, page 508-510

¹⁵ See Regnier article

How the Media Ruined the Economy

Hello again to all who are still reading! I promise this post will be considerably more toned down. I won't be including a bibliography in this one only because I am going on my own with the help of some standard macroeconomic theory. So without further distraction...

First of all, I'm not here to say that the media caused the recession or that they made greedy investment bankers trade some of the most absurd credit derivatives we've ever seen. No, I'm simply saying that the mass media had a big part in aggravating the problem and driving us deeper into this low-point/recession/depression or whatever they're calling it these days.

As you may have noticed, the mass media likes to broadcast as much "the sky is falling" news as possible. Apparently, anxious viewers are loyal viewers or something like that. So, naturally, when the bubble burst and banks started closing, the newscasts were abuzz. You might have thought that every financial institution in the country had just declared bankruptcy. Then, a week later, they're reporting that consumer confidence has taken a nose dive. I can't imagine what might have caused that...perhaps being told that all of their money was disappearing.

So what does the panicked consumer do? They stop spending money and pull all of their money out of the bank, of course. Yes, even with a big, fat $250,000 FDIC guarantee, consumers still won't keep money in the bank. Both of these actions have sweeping negative effects on the economy.

I will start with the decline of funds in the banking system. While there has not been a significant run on banks, as in the Great Depression, there has been a significant decrease in consumer funds in banks. This means that banks have less money to lend to businesses and other consumers. As a result, the credit standards for lending increase. All of the sudden, previously credit worthy businesses and individuals can't beg to get a loan. Businesses in need of leverage in order to maintain inventory levels against demand lose money. These businesses cannot keep up with payroll and have to lay off employees. These employees, having lost their source of income, significantly decrease consumption. This reduction in consumption reduces the sales volumes of companies which were not suffering from the credit crunch. These companies lose money and lay off employees. I think you can see where this is going.

Some companies, such as my father's wrought iron business, fold entirely. All the employees, as well as the owner, are left high and dry. These people are subject to the declining labor market as illustrated above. Unemployment continues to rise, consumer spending continues to decline, and the economy sinks further.

This situation is dire enough as is, but when you add the sharp decline in consumer confidence parallel to the credit crunch, it can be disastrous. This is because the impact on businesses does not wait for highly leveraged companies to start falling first. All companies producing consumer goods and services are immediately impacted when consumers aren't sure they'll have money tomorrow. The only businesses that may benefit are those producing so-called "inferior goods". The problem is twofold for highly leveraged companies, with consumer demand sharply declining and no funds available to borrow.

The economy shrinks rapidly under so much pressure. The counteracting effect, as we have seen, is that the dollar also quickly loses value under such conditions and so imports increase. This can only do so much, however, because it only really impacts the multinationals. The small businesses that are such a large part of the American economy are left high and dry.

So there you have it, a highly simplified explanation of why the economy has taken such a nosedive. Furthermore, you can see the impact of the sensationalist journalism in accelerating the fall. This is an incomplete picture, but it is all based upon sound economic theory. I'll probably come back to this later and fill in the gaps with a researched article based on actual research, so keep your eyes peeled.

NPR Insights

For some additional insight on the Big Three bailout, check out this NPR broadcast.

Go to NPR