The Economy is Just One Big Hydraulic System

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The Economy is Just One Big Hydraulic System

We are in the midst of an economic downturn, and there are vigorous debates about whether this is a recession, or depression, or just a phase of the moon. The problem with the debate is that one thing is true, face it or not – the better days are over for a while with salaries that would cross a wise man’s eye,the perks, the bonuses, the first class flights. And still the debate goes on, as debating, it would seem, is better than action.

Elementary economics gives us a clue, which is that an economy is a hydraulic system – a closed system in which pressure at one end translates into pressure elsewhere in the system. In other words, nothing happens in an economy without reactions elsewhere in the system. In economics, there’s the added element of fear. Fear of the known and fear of the unknown, which is the worst kind, and adds to the pressure.

Well, after several decades of rising housing prices, the housing bubble burst. Housing prices kept going up, inflating housing values. In that environment, mortgage lending was so safe that banks, never brilliant at understanding long term risk, thought housing values would continue to rise, so they kept lending, skyrocketing away from traditional lending practices by not bothering to check the borrowers for their credit history.

In the meantime, in mortgage financing the banks bundled the mortgages, which were purchased by shrewd investors and sold to the public as mortgage backed securities.

But then the sub-prime adjustable rate mortgages matured, and ran into higher interest rates, which a great many of the borrowers couldn’t afford. Defaults proliferated. The securities predicated on the mortgages plummeted. Those stocksare significant in the portfolios of very large investment banking firms and hedge funds, and so their losses were overwhelming. Meanwhile, back at the banks that issued the mortgages in the first place, they still have mortgages to sell – but with no buyers.

Now comes the real problem with the hydraulic effect. People high and low lost their jobs, even in the firms that didn’t go under, and unemployment rose. The businesses that depended on a strong financial system, even those not in the financial industry, began to feel the pinch of having lostcustomers. These support services – everything from the coffee wagon vendors on Wall Street to the limousine services that took the investment bankers home every evening – began feeling pain. In a sense, they joined the army of those home buyers who lost their homes in lost or diminished income. The hydraulic pressure went right down to the local grocery store, and to the suppliers of raw materials, to the manufacturers whose products aren’t selling, and continues to hit every area of the economy.

There are people in this world whose income is so low that they are, unfortunately, always so close to the punch line that financial trouble is a frequent companion. But many other people are surprised to find themselves within the hydraulic system. There is much denial, but the reality is there, and the alarm. Because the hydraulic pressure keeps coming through the system leaving for some people no place to hide. Are there defensive measures to be taken? Yes, and the answer lies in firm management, and it must be done now – before the delugehits your company.

· First, reassess the situation. Check your client list for potential weak companies which, caught up in the economic downturn, become slow payers, to no payers. Be prepared to let them go and cut your losses.

· Second, check your firm. Don’t give up real talent, but in today’s climate, don’t carry staff who aren’t carrying their share of the load.

· Third, think productivity. Review all your management processes, make sure your electronics are up-to-date, and are really saving you money. Look for potential return on perks and club memberships. And take your banker to lunch – you may need him.

· Fourth, think marketing. It’s not an expense, it’s an investment. Use it wisely, and give the marketing pros a chance, sound marketing may give you the best return on your investment.

And finally, the economy really is like a hydraulic system, which means that anything that happens at one end will eventually get to you. Pay attention and avoid surprises. You may come out ahead of the economy, whether it’s a recession, depression, or phase of the moon.

Practicum 9.8

Translate italicized parts of Text 9b into Russian

Practicum 9.9

Study the speech pattern referring to the state of mind resulting from learning some surprising facts

I was   shocked to discover
disappointed to learn
 surprised to find (out)
puzzled come to know

Translate the sentences to follow into English

Я с удивлением обнаружил, что все мои ценные бумаги выросли в цене в 10 раз

Во время кризиса людей удивляет, когда они узнают о том, что цены на коммунальные услуги останутся неизменными в течение полугода

Он был в шоке, когда узнал об утечке информации в своем собственном отделе

Он был разочарован, когда узнал, что существующая практика кредитования не позволяет ему получить ипотеку

Я был удивлен тем, как быстро рынок оправился после кризиса

Practicum 9.10

Practicum 9.11

III. Communication Practice


A group of managers are to work out more effective and consistent management styles to improve the morale and efficiency of the company. Rely on the questionnaire below as a guide for brainstorming session. Suggest a list of should’s and shouldn’t’s

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