Two Letters Re: Wider Implications of the Credit Crunch

I read your piece on the credit crunch, and believe it or not, it gets worse. Morgan Stanley not only took a $9.4 billion dollar hit, they shored up their books by getting a $5 billion dollar infusion of capital from the Chinese! They received a 9.9% share of the company in return. The same Chinese fund has also propped up the Blackstone Group, a private equities firm. – Tim R.

Mr. Rawles:
I don’t understand what all this credit and financial news means to us poor folks who don’t have any investments to lose. I have a tiny home, with a reasonable mortgage. Why is this news so bad for us peons down here at the bottom? What exactly are you saying is going to happen? – KB

JWR Replies: What I’m saying is, that even as innocent bystanders, we might be going to witness a severe economic crisis, and experience the fallout. Credit is the lubricant that keeps the American economy going. If credit dries up, the global economy will with slow down. The current (and extraordinary) rate of consumer spending is based on credit. When that credit is no longer available products will not sell. Corporations large and small will lay off workers. As unemployment rises consumer spending will decrease causing further layoffs, company bankruptcies, mortgage defaults, and personal bankruptcies. Cities and counties will have to raise taxes, since even the municipal bond market will be impacted. There could very well be a depression as a bad or worse than that of the 1930s–which was the last time there was a major credit crisis. The bottom line is that you and your neighbors could face massive unemployment. Crime rates will rise. The times could very well resemble my novel, in the near future.

The personal application to all of this is: Do you have a job that is recession or depression proof? And if you do lose your job, will you still be able to pay your mortgage and property tax? Buckle up.