Chapter 7 - Solutions for a Financial Crisis

By: Gerri L. Elder

Ben Bernanke, the current Chairman of the Board of Governors of the United States Federal Reserve, has been dancing around the “r” word for quite some time now. Other economists have been avoiding the word “recession” as well, but it has been on everyone’s minds and causing a lot of worry.

Whether or not the U.S. economy is actually in a recession or inexorably headed into one makes little difference to most. Regardless of the way the currents economic state of the county is defined, most Americans are feeling the financial pressures and stresses associated with a recession.

The value of the American dollar is greatly diminished, yet the cost of necessities such as food and gas continue to rise. Americans are on a financial treadmill and losing ground as we try to stretch the dollar further than it can possibly go. Our paychecks just don’t go very far in today’s economy.

While things are getting more difficult day by day for those who actually have paychecks to work with, many people don’t even have that luxury anymore. Mass layoffs are sweeping the country as companies and corporations restructure and merge in attempts to remain viable in the American market. The loss of jobs and inability to even earn an income has caused record numbers of people to file for unemployment benefits and apply for government welfare programs such as food stamps according to a recent Salon.com article.

As Americans struggle to cope with financial stress, the value of their homes is in a state of freefall. The days of easy cash-out mortgage refinancing and home equity loans are all but gone and banks now own more of the American dream than we do. Without jobs that provide health insurance or money to pay insurance premiums, most people are living without health coverage. Credit cards have been maxed out in an attempt to stay afloat financially and millions of people now live on the verge of bankruptcy.

Economists have been forced to admit that the U.S. economy is now, more than likely, in a recession. Now that the “r” word has been spoken, it remains to be seen just how bad things will get. There have been frightening comparisons to the Great Depression with regard to the housing market and just how bleak the financial outlook for the country may really be.

In some markets home sales have actually started to pick up, and that has given renewed hope to those people who desperately need to sell their property in order to avoid foreclosure. Those homeowners who are able to sell have a chance to salvage some of their investments, rather than lose everything by having the bank foreclose on the property. The problem is, according to a recent Consumer Affairs report, that the housing market is not the root of the financial crisis for most people. The problem is the tremendous amount of credit card debt that Americans owe.

During easier financial times, people tended to spend recklessly and now are paying an extreme price for being so careless. Credit cards and home equity lines of credit were previously so easy to get that many Americans seemed to forget that they were spending real money. There was a false sense of security in rising home prices that caused many people to get deeply into debt. Now that the home prices have fallen, and continue to sink, the safety net of home equity is gone and the bills are still due every month. There are no more credit resources available to maxed out Americans and this has led millions of people into financial crisis.

The economy is so drastically different now from what it was only a few years ago that many people have been completely blindsided by the changes. Foreclosures and bankruptcy are affecting millions of American families who would have previously never dreamed that they’d find themselves in a financial spiral.

Very soon, many Americans will receive a little financial boost courtesy of the economic stimulus package. These checks will help some people pay past due bills or pay down credit card debt some, but for many the money will just not go far enough. Next month the same problems will still be there, but there will be no government check to help out.

As far as stimulating the economy, there are serious doubts that the economic stimulus package will do much to actually help. With so much outstanding debt, it could be considered foolish to go out and spend the money as it was intended when cash in hand is becoming increasingly rare. For people who are worried about catching up on mortgage payments to avoid foreclosure, or making credit card payments to avoid filing bankruptcy, shopping for anything other than necessities is probably not in the forecast.