MULTIPLIER EFFECTS
The concept behind any stimulus plan, or easing campaign is quite simple. By assisting or jump-starting a sector or segment of an economy, we can then expect that other sectors of the economy will also benefit. In economics, the concept of a multiplier effect, with regard to bank lending, is considered an absolute. There is no doubt among FED officials and economists world wide, that we can expect a domino effect with regard to lending. For example, lending money to a bread maker will mean that the farmer sells more wheat, eggs, and butter. The farmer’s increased business causes him to buy more chicken feed, and milking machines. The cycle continues on, as the people who provide for the farmer see their sales rise. This ripple effect through the economy causes the positive benefits of the original bank loan to be multiplied.
When we created mortgages, we also had multiplier effects. When a mortgage banker secured a loan for a homebuyer; there was an enormous ripple effect.
The homebuyer needed movers, and curtains, and paint, and cable, and dishes, and towels, etc. All stores, from Bed Bath and Beyond to Home Depot, were positively impacted.
By making lending standards more stringent, and realistic, we should anticipate a huge negative multiplier effect. The reduction in loans being made will lead to less stimulation across many, many sectors of our economy. This contraction across all industries can only be offset by a new driver, or stimulating industry. Without a big development, then we will be hard pressed in this country to offset the drop in real estate activity.
HOWEVER- I am not advocating a reduction in lending standards- or any program that continues to allow misguided U.S. consumers to borrow money recklessly.
The last 10-15 years we saw our economy grow like never before. Lifestyles advanced. The standard of living increased. Unfortunately, this growth was a result of negligent lending that created a multiplier effect. Americans saw their business boom, and their property values increase. They were lulled into believing that this was the new normal. Now that this reckless lending has been curtailed, the multiplier effect has been lost as well.
Economies require constant technological breakouts and innovation in order to grow. We benefitted from computers in the 80s; the Internet pushed us along in the 90s. Then something changed. In the years that followed, our economy was fed a diet of artificial activity. We borrowed and borrowed rather than created and innovated. We built houses with borrowed money. The lenders thrilled to be making loans. The borrowers thrilled to be buying a house. (Maybe the biggest problem we face/ buying outright vs. credit)
It felt the same. The multiplier effects seemed real, and many of us developed a huge misconception of how strong the economy, our own finances, and our own businesses really were.
J.O.Y. TO THE WORLD peter
Tags: lending, multiplier effect