Wednesday, October 1, 2008

Don't Take the Economy for Granted

The current financial crisis is scary to us because it exposes the economy for what it is.

It is NOT a given. It is an ACCOMPLISHMENT.

A soundly functioning economy is the product of a host of actions: from business owners, workers, government regulators, banks and other lending institutions, and the "back office" organizations that keep everything humming along.

And at the core of this cobbled together structure called capitalism is one word: TRUST!

At the consumer level: here's an example of trust in the financial system. If you hit my car, I don't try to steal yours to make up for my loss. I TRUST that GEICO my insurer will handle my claim and I will be made whole.

The same is true at more esoteric levels of the financial system. In the case of AIG -- if I held mortgage backed securities, and those securities went down in value, I have to keep more money in my company to balance that out.

And if those securities become valueless -- I know that my insurance premiums I pay to AIG will cover my losses and prevent my business from going out of bsuiness. Without that security, well, it becomes too risky for me to lend; it's more lucrative to just sit on my cash while everyone else who lends goes under.

Would you risk driving a car you if woke up one day and there was no car insurance? Probably not. Could you get to your job? Buy groceries? Go to the gym? And if the government didn't intervene, don't you think the economy would tumble? If consumers can't buy goods, stores will lose money, many will close, jobs will be lost.

Like with Humpty-Dumpty -- all the kings horses and all the king's men wouldn't be able to put the economy back together again. The trust -- and the infrastructure that generated the trust -- will be gone.

Same is true in the global economy right now: don't take this economy for granted if you aren't willing to invest in the infrastructure that makes it successful.

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