Main Street USA in Walt Disney World’s Magic Kingdom seems far, far away from the meltdown on Wall Street.
Children hug Winnie the Pooh. At Town Hall, the mayor sings, Supercalifragilisticexpialidocious. Yet Wall Street’s financial mess has touched even this idyllic world.
Thanks for posting this piece, Kendall. It is indeed an illuminating example of the powerful domino effect as the damage done by greedy Wall Street lenders and investors ripples through the general economy. For a non-economist like me, it was helpful in understanding the causes of this whole financial mess, and how it’s playing out “on Main Street.”
David Handy+
Interesting enough, my son manages one of the largest AMF Bowling Centers in the US. He’s here visiting. I asked him, “If people don’t have any money, how come your bowling center is so busy??”
His answer, “Well, folks can’t afford to go to Disney World, and all the other high-fee places, but they can still find money to take the family bowling”.
Lately,I’ve been wondering if some businesses havent taken advantage of higher paychecks, and priced themselves out of business.
Grandmother in SC
2, that could very well be the case.
Does everybody not see how debt at artificially low interest rates makes the fundamentally unsound seem fundamentally sound? How it diverts capital to unsustainable ventures? And all the advice from voodoo economists with the exception of the Austrian school that has called it right from the beginning is to lower interest rates and inject new money, setting the stage for the next round of malinvestments, which will be unwound in their turn.
Byzantine, the thing is that interest rates themselves are an input into what is sound and unsound. All investment is in the nature of a bet, and when borrowing, part of the bet is that the return will compensate for the expense of borrowing. The vagaries of interest rates are simply an input to the judging of this risk.
For example, we bought our house with a 7/23 loan. After seven years, our original mortgage would would have adjusted once. In assumption of this risk, we got a somewhat lower interest rate than we would have if we had taken a 30 year fixed. The risk we took was that my income and changes in interest rates would combine so as to not make the house less affordable when the adjustment came. As it happened, interest rates dropped, and we refinanced into a fixed loan which we have kept ever since. We took a fixed loan because we preferred not to bet that interest rates would continue to drop (though they did, somewhat).
It is true that, all other things being equal, low rates encourage riskier investing. The flip side is that “riskier” works in both directions; new technology investing, for instance, is inherently risky, so damping investment means damping innovation. But far more important is the problem that risk is really hard to assess, because the chaining dependency between institutions and investments makes it really difficult to get adequate information. In a pre-FDIC world, for instance, any bank could be taken down simply by rumors of insolvency. In the Maryland savings and loan debacle, the state government had to scurry around to prevent the failure of several S&Ls;from taking out every such institution in the state, in spite of the reality that the sins of the three chief offenders were not universally practiced. A major feature of the current crisis is that the securitization of mortgages concealed the unsoundness of individual loans.
Jacking up interest rates is a stressor on the financial system; making money less available increases the risk across the board. Ideally one would like to loosen things up enough to allow marginal risk-takers to put themselves in a safer position rather than being folded (because their folding increases the strain on the rest), but one would also like to discourage people from making new risky investments. Probably the best force for the latter is simply the sense that times are risky and that it would be wise to play things a bit on the safe side.
Frankly, I haven’t been able to go to Disney World for the last five years, and before that only with judicious saving for the event.
Tickets are now over $60 per adult per day per park. Children are $50.
And they wonder why visitors are down?
A packet of tickets at Disneyland in 1969 was over $20. According to BLS, those tickets should now cost $!20.
Wingate,
That is an argument from counter-factuals. Along those lines, should not everybody be given an interest-free loan of $1 million to invent the technology that can cure cancer? Nobody knows what the rate of interest should be. Only the market process can set the clearing price for loanable funds, just as only the market can set the clearing price for styrofoam cups. Exogenous efforts to move the equilibrium price on the supply-demand curve can only produce distortions, such as $400K townhomes in bad areas of town. The only cure for malinvestments engendered by moral hazard and artificially cheap credit is to liquidate them and let the market again set the equilibrium price.
C. Wingate,
At that time, each ride had to have it’s own ticket, based on an A – E rating/pricing system.
We cheered when it changed to admission got you all the rides as well.
Still a family of four cannot afford to visit Disney much more than once in a life-time. As the commercial shows, over $1,600 for a week! Even in Florida, it might be cheaper, but still costs dearly, since Florida wages have not kept up very well with inflation.
Well, even what you call “exogenous” forces do nothing more than influence the players in the market. Saying that they shouldn’t be influenced– and any advertising guy will laugh at that– is among other things a claim that the players know well enough what they’re doing to be left to their own devices, and that if so unregulated, they will produce the “best” result. As I find myself saying from time to time, I don’t see how a Christian can place their faith in this. People are sinners, and a system powered by desire is going to prompt people to take risks and other people to act fraudulently.
Also, I do not find either of your examples compelling. Besides its other faults, your hypothetical loan doesn’t follow from anything I have said, and you didn’t bother to justify that it does follow. And I do not see styrofoam cups as being useful analogues for derivatives. Such a commodity manufacture does tend to be well-governed by simple market forces (modulo the usual fraud), but cups are not ordinarily financial instruments. In particular one cannot get people to invest in individual cups and then bundle them into packages whose precise worth is thus concealed.
And if people think there is gain to be found in the $400,000 townhouse, then the demand curve will be pushed in that direction, and townhouses will go for $400,000. It isn’t accurate to call human psychology “exogenous”; indeed, I think to be a true market dogmatist you have to be willing to eschew any talk about market “manipulation”, because you’ve placed the forces behind demand outside of consideration. But that’s just my view.