BUTTERFLY ECONOMICS - 5 Things You Can Do To Start an Economic Recovery

By
Real Estate Agent

by Rich Schiffer, Weichert Realtors

Many people have asked me about the current economic crisis, and what I think about the proposed $789B economic stimulus bill.

They have trouble understanding why things got so bad, so fast.

I have to admit to them that I have no answer - at least not one that will improve things as quickly as they declined.  In fact the answer that I do have for them is not one that they typically want to hear:  We caused the problem ourselves - essentially through a lack of awareness of the consequences of our actions. 

The movie, "The Butterfly Effect" made many people aware of a complex concept that is part of Chaos Theory.   Simply put - a seemingly innocent action can contribute to a spiral of cause and effect that can ultimately become catastrophic.  The classic example is a butterfly flapping its wings in Sri Lanka in November leading to a Tornado in Oklahoma in February.

In applying that theory to open economy macroeconomics, and looking at the spiral of cause and effect, we can begin to grasp the severity of the crisis.  Consider this:

How many people in total are employed in the construction of a home? 

Factor in not only the construction workers and architects, but you must also consider all the workers that produce the materials that the contractor uses, the truck drivers that deliver the material to the job site, the gas station attendant that filled the delivery trucks fuel tanks, and the workers that built the trucks themselves.  How many people does it take to make the nails which hold your roof on?  How many workers were employed to produce the cut lumber that your walls are framed with?  Now factor in the mine workers that dug the ore that the foundry workers used to make the steel and copper that was used in the construction.  Don't forget the workers that made the power tools used at the construction site, the retail clerks and cashiers that sold them to the contractors.  The heavy equipment was built by someone somewhere, with parts made by someone somewhere.  All the people involved throughout this chain eat somewhere, so we have to also include the grocery store clerks, waitresses, cooks, dishwashers, and lunch-truck caterers who provided service to them.  Then there are the farmers that produce the raw materials that go into our food, and the distributors that get it to market.  Don't forget the auto-workers that built the vehicles that all these people drive to get to their respective places of business. 

Economists and statisticians have estimated the number of people whose work goes into building a single home to be over 64,000.  That number goes up almost exponentially when we consider all the people employed by the homeowner in the first year of ownership - furniture makers, carpet installers, appliance manufacturers, lawn-care workers, painters and the people that make those cute little garden gnomes.

Once we have a clearer picture of the vast interconnectedness of the economy, we can see that a slowdown in the housing market bleeds into many other industries.  Businesses that were over-leveraged or under-capitalized were hit harder than they could bear, resulting in bankruptcies, layoffs corporate downsizing, and emergency bailouts.

The spiral of cause and effect then picks up a head of steam.  The workers who are laid off, or have their hours cut are then forced to cut their personal spending.  This further strains the businesses who had survived the initial slowdown.  They then have to cut back on staffing to match the new decreased demand for their services.  This then creates yet deeper economic shrinkage and we get plunged into Recession or even Depression.  Without an intervention in this vicious cycle, any economic recovery would be a long-time coming. 

Think of the current economy as if it was a person bleeding to death - the longer the bleeding continues, the harder it becomes for the body to function.  The extremities stop functioning first as the body's systems try to maintain heart, lung and brain activity.   Eventually, the body shuts down entirely.  What is needed is intervention to stop the bleeding, and an introduction of new fluids to enable the body to recover.

This is the ultimate goal of the current $789B economic stimulus bill.  Stop the bleeding (job loss) and introduce new fluids (money) to enable the body (the American Economy) to recover.

Whatever their politics, whatever their personal views of such massive government spending, most people will admit that a recovery is better than a continued accelerating downward spiral.

But as I said initially, we caused the problem ourselves.  We can prevent a similar situation in the future if we heighten our awareness of the consequences of our actions, and take actions that will create a chain of cause and effect that acts as an uplifting force.

The end effect of the butterfly's beating wings does not have to be catastrophic.  A positive spiral can similarly be put into motion,

Here are 5 things you can do to help start an economic recovery.

  1. Produce something others need.
  2. Buy something others produce.
  3. Hire someone to do the things you can't.
  4. Whenever possible, frequent local businesses.
  5. If you borrow, pay back what you owe.

 

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Rainmaker
334,694
Jeff R. Geoghan
Coldwell Banker Residential Brokerage - Lancaster, PA
REALTOR, Marketing Manager

Rich, and there you are!  Good to see you back. 

Your 5 points are the basis of a sound fiscal society.  Notice that the word "Government" isn't in there anywhere.

 

Feb 11, 2009 12:47 PM #1
Rainer
302,425
Terry Haugen STAGE it RIGHT! 321-956-2495
Stage it Right! - Melbourne, FL

#6, if I might add one is BUY AMERICAN!

Feb 11, 2009 01:43 PM #2
Rainmaker
92,270
Lynn Johnson
Coldwell Banker Home Connection - Owatonna, MN
Owatonna, MN Real Estate

Rich - you've made some solid points.  Thanks for sharing.

Feb 11, 2009 01:54 PM #3
Rainer
116,841
Rich Schiffer
Swarthmore, PA
Referral Agent, e-PRO

Jeff -- Thanks.  As to your comment about "government" -- There is a legitimate place for government.  The legitimate function of a government is to do what individuals cannot do on their own.  For any government to function at peak performance, the government must do what the people cannot, and the people must do invididually what the government cannot.

Terry -- Your sentiment is certainly a valid one. I take a slightly different view, but one that fits yours, I believe.  I say, "Buy Local" as opposed to simply "Buy American."  When comparing the economic impact of buying an imported product versus a domestically produced one, I think the choice is clear.  The domestically produced product's purchase has more of our consumer spending recycled through the rest of our economy.  But in an open economy, there must always be import as well as export, so don't summarily dismiss imported product. 

Lynn -- Thanks.

Feb 13, 2009 12:36 AM #4
Anonymous
Steven Robert Sanders

Rich -

I have read your blogs and responses for some time and am impressed by teh depth of knowledge you possess. I think I might be able to shed some light on the bursting of the real estate bubble and subsequent melt down of our entire economy.

First a little background. I was a banker for ten years rising to Regional Vice President with a large international bank. I also ran a multimillion dollar mortgage operation in California. I have been a Realtor since 1988 and am now a broker and co-owner of my own real estate company.

In the 1930's, the last time things were arguably this bad, lenders and stock brokers lead the nation into the Greatest Depression before and hopefully since. FDR's administration created teh FDIC and passed stringent laws to protect the US economy from the financial excesses of the financial industry.

When I first started in banking, in 1973, a monkey sitting at a bank desk could make a decent return. The laws were that protective and that tight. Unfortunately, beginning with Nixon, continuing through Ford, Carter, Reagan, the two Bushes and Clinton administrations, congress and the presidency have seen fit to remove many of the restrictions that kept our money safe.

When a fox is invited into the henhouse, the outcome is predictable and deadly, and that is what happened. Fee hounds, unconcerned about either ethics or the future of their own companies made millions of dollars at the expense of economic safety.

We have historically not learned from economic mistakes and my greatest fear, despite all we've begun to hear from cheerleaders in Washington, is that we have not yet come close to bottom.

Yes, the clients themselves made mistakes, buying properties they really could not afford and no one held a gun to their head to sign on the dotted line. Many mistakenly trusted their lenders to give them guidance. Many could not understand the contracts or even speak sufficient English to understand what they were signing. I have been witness to literally thousands of document signings and will tell you that the contracts and terms have become so complicated even the lenders cannot explain them.

What we are forgetting is that no one held a gun to the heads of the financial institutions creating these crazy loan products, and no one told Wall Street they had to buy them. Each entity in the daisy chain purchased the bad idea, tacked on a commission and sold it to the next gullible sucker, and no one held guns to their heads either. And frankly, no one responsible for oversight was watching closely enough.

A bad idea is still a bad idea and we expected our financial brethren to protect us from them. It is what Greenspan said months ago when admitting that he trusted the financial industry far too much. He could not believe that they would be foolish enough to do harm to themselves. Wake up and smell the history. You cannot trust those who are only out to make a buck. That would describe the entire financial services industry, wouldn't it?

May 19, 2009 07:23 AM #5
Rainer
116,841
Rich Schiffer
Swarthmore, PA
Referral Agent, e-PRO

Steven --  Thank you for the insiders view.  In this case, certainly, it can truly be said that, "Love of money is the root of all evil."  Greed -- personal and corporate -- was behind the implosion of the mortgage market.  Let's hope that lessons are learned all around, and that the response is not too far the other way -- we need a correction, not an over-correction.

Oct 06, 2009 12:50 PM #6
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Rainer
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Rich Schiffer

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