Billy's Frightened

by Lee Smith

Tags: Slow,

Desc: True Story: This is not Part 2 of Billy's First Job. My muse is on vacation to warmer climes and, since it snowed here today, I'm jealous. In this story, Billy, our perennial teenager and economic tyro, is afraid all the horror stories he's hearing about the imminent, world-wide, economic depression are true. It's Dads' job to help him understand the truth and, maybe, even prepare for the future.

Billy was watching his Father reading his paper, relaxed in his recliner with a small smile on his lips. "Dad? Can I ask a question?"

His Father looked over the paper at his 14-year-old son and noted the worried look on his face. "Go ahead but you know I don't promise an answer."

Somewhat aggravated, Billy continued, "I know, Dad, but this isn't anything personal, I'm concerned about this economy thing we keep hearing about. Are we in trouble?"

"By 'we' do you mean our family, are you referring to the general population of the United States, or maybe just this state or city we live in?"

"Well, I guess I'm asking if this trouble is going to affect us. Can we lose our house? What about paying the bills we have? Will we go hungry or have to cut back? Things like that?"

His Father put down the paper, leaned back in the chair and looked at his Son. "Billy, what's happening in the country and, probably the rest of the world, is either perilously close to a recession or already in one."

"Okay," Billy interrupted, "just exactly what is a recession?"

"Hmmm," he voiced as he thought about his Son's question. "Basically, a recession is when people lose confidence in the economy, for whatever reason and, consequently, curtail their spending for extras like cars, houses, luxury items, recreational things like vacations or going out to eat as much or going to the movies as much. In short, a recession is when, for some reason, people sharply decrease spending money. Does that help any?"

"Not really, Dad. What's the big problem with people spending less money then they did? I mean, I'm always listening to you complain that people are spending too much money and not saving any at all."

"You're right, I do say that a lot and I mean it. Unfortunately, what's happened right now is, historically, fairly recent. It all started about 1960 or so, when credit cards were invented. Because credit became so easy to obtain people quickly got used to spending more than they made. Right now, the average household in the United States is well past $50,000 or more in debt. And, by the way, that does not include home ownership. That's way up from the 50s when the average debt load was less than $4,000 per household which did include home ownership.

"Son, do you remember once when you asked me what money was?"

"Sure, you said it was nothing more than a tool people used to acquire the things they wanted. Seems to me I remember you saying it was an invention someone came up with to ease the problems associated with bartering. In fact, I think that was a quote you made during that discussion we had."

"It's good to know you were listening and, yes, you are absolutely right. Also, if you remember, I told you the economy before the early 1950s was mainly a cash economy. Basically, if someone wanted something they saved their money and paid cash when they had saved enough. One reason the economy was that way was because credit was extremely difficult to get. Back then a local economy could slip into a recession quite easily. The only thing needed was for people to lose confidence for some reason or another and the recession happened. Fortunately, most of the recessions were local in nature. A nation-wide recession was fairly unusual.

"Since the 50s people and businesses have become more and more dependant on credit. In fact, did you notice, about a week ago, when one of the commentators in the evening news made the statement, 'Credit is the engine that drives our economy'?"

Bill smiled and nodded his head, "I remember," he chuckled. "In fact I remember the sour look on your face when he said it, too."

His Dad chuckled a little bit. "That reminds me. Before I forget it and, just as an aside, a few day ago I was talking to a friend who was complaining about this very thing. Seems, he and his wife went to the Title Company to close on a property they had purchased. They brought cash for the required down payment. The Trust Officer did not know how to take cash nor did he know how to make out a cash receipt. My friend had to mention the fact that cash is legally acceptable as a means of payment before the Trust people would finally take the money.

"It really has gotten to the point where paying cash is somewhat unusual. Because of the wide spread dependence on credit, it's more difficult to fall into a really serious recession, but it can happen. All that's needed is for credit to dry up and people to slow down on their spending. And that is exactly what is happening right now.

"Right now, credit is virtually frozen and, as a result, people have severely slowed down spending what money they have. If it keeps on long enough it's going to cause some serious problems in the economy." He stopped to take a drink from his, now, tepid cup of coffee. That gave Billy a chance to ask another question.

"Problems? Exactly what kind of problems?"

"If the general population stops, or severely slows down its spending, it causes several things to happen; something like a chain reaction. Local businesses don't sell as much as they have been. If that continues the first thing the owner will do is cut back on the workers' hours thus decreasing their paychecks. Lower paychecks means less money to spend and even more slowing down of spending. Ultimately, some people will lose their jobs causing..."

Billy jumped in saying, "Even more slowing of spending?"

"Right you are Son. Next on this train of thought we're exploring is, what happens if the stores in town start cutting hours and jobs?"

"Ummmm, some businesses will close?"

"Right again but not completely correct. Have you ever heard the term 'the ripple effect'?"

"Sure, my teacher used that term when she was talking about 'The Great Depression" in history class. But, she said it couldn't happen again because the government did some things that will protect us."

"Well," Billy's Father took a deep breath and let it out, "she's partly correct. At that time, the government did do some things that will protect us from some of the same kind of problems reoccurring. Those changes may even keep us out of one this time. We'll see.

"Anyway, back to what we're talking about. When businesses start laying off or firing people they also stop buying as much product to sell. If they have a large inventory in a warehouse somewhere they'll use that up before they order any more and, when they do order, it's far less than before. That means they won't have as much product delivered. Care to guess who are the next folks to start getting cut back, laid off and maybe let go?"

Being a pretty sharp young man and to prove to his Dad that he had been listening Billy answered, "The delivery companies?"

"Good man! Again, you're absolutely right but not completely. Not only do the delivery companies lose a lot of the work that keeps them going but the manufacturers receive fewer orders for new stuff so they start slowing down just like the businesses here in town. Now, here's the next tough question; if the manufacturers slow down and do less work what's the next group to lose and therefore slow down?"

"Boy, you don't ask easy questions do you?" Billy asked.

Billy's dad didn't bother to respond. He knew it was a rhetorical question and deserved no answer.

Suddenly, a light came on in Billy's eyes. "Dad? Wouldn't the next group be the places where the manufacturers buy their material from?"

"Nice, Son. Good job. Again, you're right." Billy's dad smiled and continued, "Now that's not the whole story but suffice it to say every business and endeavor is affected. Installers don't install as much. Contractors don't build as much. Truckers don't truck as much, etc. etc. etc. Unemployment goes up, wages go down. Raises, bonuses and pay incentives go down. Commission salespeople certainly don't make as much. Part time workers start looking for more hours in an environment where hours are cut. Frustrations rise, illness increases and, sad to say, things like domestic violence, abuse and suicides will go on an increase. Some people will try to hide in a bottle or drugs. Road rage will increase. A hard and prolonged recession hurts everyone and everything. No one is safe.

"Billy, does that help to answer your question?"

"Dad, I really don't think so. I came in being a little worried about what was going to happen but now I'm even more worried. Will our family be okay? Will we be all right?"

"Billy, your mother and I have always been frugal people. One of the many things we have done is have as few bills as we could manage. Both our cars are paid for. Now, maybe you'll understand why we drive these cars as long as we can rather than buying a new one every two years like some families of your friends. You know how your mother stocks up with lots of things when they go on sale? Well, now you know there are two reasons she does that; to protect the family from future price hikes plus to be in a better position if something like this happens. Many years ago your mother and I made the decision we wanted at least six months of non-perishable food stuffs and other household necessities on hand at all times if it was at all possible. That will certainly help us now.

"I'm sure we'll have to cut back on our spending, in fact, we all ready have, but we'll make it pretty good because we have always been frugal people, stayed out of debt and saved our money. Now you know one of the things we've been saving for."

"Okay, that makes me feel better," Billy said, "but what I don't understand is this housing collapse. How does that figure into what we've been talking about?"

"Whew," Billy's Dad said, "and you say I ask tough questions. Well, let's see if I can explain this thing.

"Many, many years ago, when your mother and I bought our first house we not only had to have a really good credit standing, we also had to pass a kind of test. At that time, the 'rule of thumb' was a person should not buy a house that cost more than two and a half times their annual salary. Loaning only to people who had a good credit history or having someone who had a really good credit history co-sign the loan plus being sure the people who were buying the house fell within that two and a half times annual salary test, basically insured the banks would not lose money through people defaulting on their loans. Being almost guaranteed they wouldn't lose money gave them the confidence they needed to continue to loan money."

"Okay Dad, I can see that but how does that relate to what we have going on today?"

"Son, the answer to that question goes back to the credit card thing we just talked about. Somewhere in the latter part of the last century, the people who ran the banks when I was growing up, retired. New people were hired and they came with new ideas and one of those ideas was to increase the amount of monies they loaned because, for a bank, the more money they loan the more money they make. Banks and other lending institutions quickly saw how much more money was being made from giving more and more people easy credit. Those lending institutions began making it easier for people to borrow larger sums of money. Cars became easier to buy, loans got even easier to get and, ultimately, it became easier to buy really expensive things like houses.

"As the banks and other lenders saw their profits get higher and higher they looked around to find more ways to make money. They started instituting fees they could charge their customers for work they had always done as a courtesy. They looked for more and different ways to make it even more attractive for people to borrow money. Ultimately and without going into great detail, what evolved was a climate where the banks willingly took steep risks, loaning money to almost any warm body that walked through the door. They had the means to sell these high-risk loans to other institutions known as Mortgage Banks. Several of these high-risk loans were 'bundled' together and sold as a block of mortgages. The banks, the original lenders, sold their high-risk loans at a steep discount. This gave the original lending banks lots of capital to continue giving out loans. By selling their loans to other institutions they minimized their own risk by selling them to other groups. But, there was a built-in problem and it finally reached up and bit them right on their fat, rear ends. Many of these loans were what was called Adjustable Rate Mortgages, or ARMs."

"What does that mean, Dad?"

"Well, an ARM is a loan which starts out at a very low interest rate but, after a certain amount of time, sometimes as short as one calendar year and sometimes more, the interest rate was adjusted to reflect the Prime Rate at the time. These were known as Prime-Plus loans. Keep in mind, as with almost everything financial there are variations and different ways to package a product but what I've told you is the essential set-up of Adjustable Rate Mortgages."

"Whoa Dad, what's Prime Rate mean?"

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