How the Media Ruined the Economy

Hello again to all who are still reading! I promise this post will be considerably more toned down. I won't be including a bibliography in this one only because I am going on my own with the help of some standard macroeconomic theory. So without further distraction...

First of all, I'm not here to say that the media caused the recession or that they made greedy investment bankers trade some of the most absurd credit derivatives we've ever seen. No, I'm simply saying that the mass media had a big part in aggravating the problem and driving us deeper into this low-point/recession/depression or whatever they're calling it these days.

As you may have noticed, the mass media likes to broadcast as much "the sky is falling" news as possible. Apparently, anxious viewers are loyal viewers or something like that. So, naturally, when the bubble burst and banks started closing, the newscasts were abuzz. You might have thought that every financial institution in the country had just declared bankruptcy. Then, a week later, they're reporting that consumer confidence has taken a nose dive. I can't imagine what might have caused that...perhaps being told that all of their money was disappearing.

So what does the panicked consumer do? They stop spending money and pull all of their money out of the bank, of course. Yes, even with a big, fat $250,000 FDIC guarantee, consumers still won't keep money in the bank. Both of these actions have sweeping negative effects on the economy.

I will start with the decline of funds in the banking system. While there has not been a significant run on banks, as in the Great Depression, there has been a significant decrease in consumer funds in banks. This means that banks have less money to lend to businesses and other consumers. As a result, the credit standards for lending increase. All of the sudden, previously credit worthy businesses and individuals can't beg to get a loan. Businesses in need of leverage in order to maintain inventory levels against demand lose money. These businesses cannot keep up with payroll and have to lay off employees. These employees, having lost their source of income, significantly decrease consumption. This reduction in consumption reduces the sales volumes of companies which were not suffering from the credit crunch. These companies lose money and lay off employees. I think you can see where this is going.

Some companies, such as my father's wrought iron business, fold entirely. All the employees, as well as the owner, are left high and dry. These people are subject to the declining labor market as illustrated above. Unemployment continues to rise, consumer spending continues to decline, and the economy sinks further.

This situation is dire enough as is, but when you add the sharp decline in consumer confidence parallel to the credit crunch, it can be disastrous. This is because the impact on businesses does not wait for highly leveraged companies to start falling first. All companies producing consumer goods and services are immediately impacted when consumers aren't sure they'll have money tomorrow. The only businesses that may benefit are those producing so-called "inferior goods". The problem is twofold for highly leveraged companies, with consumer demand sharply declining and no funds available to borrow.

The economy shrinks rapidly under so much pressure. The counteracting effect, as we have seen, is that the dollar also quickly loses value under such conditions and so imports increase. This can only do so much, however, because it only really impacts the multinationals. The small businesses that are such a large part of the American economy are left high and dry.

So there you have it, a highly simplified explanation of why the economy has taken such a nosedive. Furthermore, you can see the impact of the sensationalist journalism in accelerating the fall. This is an incomplete picture, but it is all based upon sound economic theory. I'll probably come back to this later and fill in the gaps with a researched article based on actual research, so keep your eyes peeled.