Where is the Money?

During the luncheon, Raymond Chester asked a seemingly simple question: "Where did all the money go? What happened to the money?" Understand that Ray is an intelligent and thoughtful person, having led a very successful post football career developing and operating golf courses. He recently served as Chair of the Oakland-Alameda County Coliseum Commission. But the answer to his question is difficult for many people to grasp.

Tremendous wealth has been destroyed in the last 18 months. Property values have declined precipitously, and much of the money in our economy was based on real estate values: second mortgages were used to buy cars, boats, furniture, stereo equipment, take vacations, and refinance credit cards. That source of capital into our economy has disappeared.

Dropping values have wiped out the equity in many homes, making it impossible for many homeowners in adjustable rate mortgages to refinance, causing them to default and lose their homes. Construction of new homes and remodeling of existing ones has been ground to a halt, causing construction companies and real estate developers to go bankrupt and close their doors.

Further, stocks have dropped 50%+ from their highs, and margin calls have wiped out many investors. Dividends have been cut, reducing incomes for many investors, particularly retirees.

In short, much of the cash in our economy had been supplied by leveraging rising asset values. With the dimunition of those values, the ability to lever them for either commercial or consumer lending is kaput. And with it went "the money."

The reduction of debt available both commercially and for consumers has led to a drastic reduction in the fortunes of contractors, retailers, automobile manufacturers, makers of durable goods, and all their suppliers. Unemployment is pointing towards 10% nationally and in Michigan may already be 20%. In the US - not latin America.

The only thing that is going to turn the economy around is the availability of credit for commerce, real estate, and consumers. Until that happens, Raymond, don't expect to see "the money" again any time soon.