Economics and you

The current economic situation should not come as a surprise to anyone. The global GDP has risen over 4.5% per year over the past four years and it is impossible to keep up at that rate of growth. Experts, as early as April 2008, were already predicting a rescission not just domestically, but globally as well, for 2008/2009.

In this year alone we have seen Bear Stearns go bankrupt in the spring, Freddie May and Fannie Mac starting their downward spiral in the summer and this fall Leman Brothers filled bankruptcy and had the US Treasury not intervened, insurance goliath American International Group would no longer exist. Now General Motors, a major player in the automotive industry over the past 100 years, is fighting an uphill battle just to stay in the business. This past April, GM only held 16% of the domestic automotive market, and the total market share by the Big Three was at 47.5%. The lowest it has ever been for American carmakers.

With all these firms collapsing, or on the verge of collapsing, it has an effect on the US Economy. The loss of business means loss of jobs. People once employed to businesses that were deemed “too big” to fail, have learned a lesson the hard way, the job security of old no longer exists. Firms that are one the verge of going under have had to cut variable costs, jobs, just to keep their heads above water.

The US Congress has deemed it necessary though to intervene on many of banks from going under and enacted the Emergency Economic Stabilization Act, more commonly referred to as the bailout. Through this act, the US Treasury is able to spend $700 billion to purchase distressed assets, especially mortgage-backed securities, and make capital injections into banks.

This bailout can be harmful for a free market society. A businesses success is directly related to how well it’s ran. If poor decision were made by the people in charge, then they should bear the consequences. Take a look at a local shopping center. There are businesses opening and closing all the time. This is not because the location is cursed, but because of poor management or failure to secure a niche in the market. When they go out of business, they do not receive an Economic Stabilization package from the government, the burden of failure is put upon the owners, and the same should hold for big business.