Published: October 12, 2008 12:20 am      

The sky is (not) falling!

One day, as Chicken Little was scratching for lunch under the old oak tree, an acorn fell and struck her squarely on the head.  “I must warn the others,” said Chicken Little, “for the sky is falling!”

 

The most fitting allegory for the state of our economy is a combination of “Chicken Little” and “The Emperor Has No Clothes,” as both fables adequately describe what is happening to the U.S. economy.  The blissfully ignorant who enjoyed the fruits of the overvalued stock market are now panicking because the pendulum is swinging the other way.  The house of cards (credit cards, that is) has fallen, exposing the naked greed that fed the frenzy.

Not even in our small, southern Camelot of Meridian can we escape the panic that is gripping the nation as our stock market plunged from riches to rags in just over a year, dragging the rest of the globe with us. On October 9, 2007, the Dow Jones Industrial Average hit an all time high of 14,164. Friday, almost exactly a year later, the market closed at 8,451, wiping out five years of gains in just one year. That’s an estimated $8 trillion in losses. 

Unfortunately, many of those losses are being felt by retirees and near-term retirees, who saw their 401ks blossom over the last few years. The baby-boomers who were going to “live large” in retirement are now drastically downsizing.

So, what went wrong? The majority of the blame is being placed on shaky, sub-prime mortgages and flimsy financial instruments, but those were simply the falling dominoes that started this mess. I believe a big part of the underlying problem is something called myopia.

The dictionary defines myopia as “a condition in which the visual images come to a focus in front of the retina of the eye resulting especially in defective vision of distant objects.” Most people know this condition as being nearsighted.

Corporate America suffers from an acute case of myopia. Far too many companies make decisions based on the short-term, even when those decisions are detrimental to the long-term health of the organization. I have seen a company build a warehouse to store obsolete products simply because it cost less to build the warehouse than write off the worthless junk stored in it. Of course, that company is now out of business. 

Why do companies make such decisions? One reason is because executive pay and bonuses are usually tied to short-term profits. Also, a company that makes a profit enjoys higher stock prices, which are beneficial to the shareholders. Therefore, company executives make decisions that will increase their short-term profits and hope things improve in the long term.  I learned long ago that “hope” is not a viable strategy.

Myopia also affected American consumers, who fell prey to easy credit and became addicted to the instant gratification brought on by “easy financing.” Instead of looking at the overall cost of a large purchase, consumers looked at the monthly payments in determining affordability.  This myopic mentality spread to home purchases, offered at low, adjustable rates and collateralized by the artificial high values of real estate.

People bought homes beyond their means with the hope that both the value of the property and their incomes would rise. At some point, “hope” failed as a strategy. The American dream of owning a home with a white picket fence became the nightmare of owning too much home and owing far beyond one’s means.  Because of our near-sightedness, the future has come to haunt us. 

So now we are nursing the hangover brought on by years of spending money we didn’t have on things we couldn’t afford. The good news is we will get better. I believe our economy will come back strong, but at a slower, more manageable growth rate. The other good news is that our local financial institutions right here in Meridian are strong and healthy. 

The sky is not falling, but the wake-up call is loud and clear. Sometimes we need an acorn falling on our head to knock some common sense into us.



Crystal Dupré is publisher of The Meridian Star. E-mail her at

cdupre@themeridianstar.com.