Written in late 2006

     I saw this on a T-shirt when I lived in Oklahoma City. This was during the previous recession of the 80’s.  Gasoline prices had risen to all time highs of almost $1 a gallon, and oil had topped out at over $20 a barrel and then fell causing a great deal of bad business loans in Oklahoma and Texas, the rest of the country was pretty happy with falling gasoline prices.   The banks in the region were called tar paper shacks because of heavy reliance on the petroleum industry which had been booming during the previous years, this boom also gave many jobs to folks who lived there, lots of money around and real estate prices reflected this, lots of houses being built and prices were rising. Interest rates were high but that didn’t matter, good pay and lots of overtime meant anyone who wanted to work could afford a nice new house.



     After the bust in oil prices, companies that serviced the oil industry went out of business or cut back on employees.  Most banks were fairly well managed with reserves mandated by the federal government. The local banks were capitalized with real-estate loans, business loans and loans to other banks, all well and good when prices are up and things are good.  But when the oil industry died many of the loans went bad, one bank in particular, Penn Square Bank, was hit very hard and in July of 1982 the fed closed its doors.  Within a short time many other banks were in trouble, including Continental Illinois National Bank and Trust Company (considered the 7th largest bank in US) failed due to bad loans to Penn Square Bank...the fed propped this one up to keep the rest of the banks in the US from following suit.  This was a "local" problem and banks in Oklahoma and Texas just had to scramble to stay afloat...jobs were gone in the region and many folks could not afford their mortgages and the banks foreclosed- no help from the government, just foreclose, write off the bad loans  and watch real estate prices crumble as this property was dumped on an already depressed market.

So, what is going to happen this time?  I just read that two banks in Europe were going to write off $23 billion in bad debt caused by US banks (Penn Square defaulted on $600,000) oil is over $100 a barrel, gasoline will be $4 soon and house prices are up pretty high.



     We are headed for another recession but this time the whole country will be involved.  There are two kinds of recessions inflationary where prices rise faster than wages, which means you don't have enough money to buy things, or deflationary recession where wages fall faster than prices with the same result of you don’t have enough money to buy things.  If we don’t buy things, the factories don’t build things, industry slows and people loose jobs.

The governments current plan to prevent catastrophe is to keep interest rates low and give people money to spend (economic stimulus package), more inflation and higher prices, will your wages increase to compensate? Are you ready for $6 a gallon gas or milk? Do you have your IRA money somewhere safe from bank failures? Can you buy the foreclosed real estate that will be coming on the the market soon?  Is your portfolio liquid enough to buy commodity futures?

     Wow, this got a lot more long winded than I had planned...time to get off the soapbox and check on the kids...I’m gonna boil up my old shoes so we can have dinner...