29.9.08

REVENGE OF THE NERDS. Vermont Tiger's Art Woolf offers plain advice for difficult times.

Recent events have shaken our confidence and made us wonder how the financial meltdown will affect us personally.

For most of us, the answer is... not much.But it will be hard for anyone to entirely escape. The U.S. government does not spend upwards of $700 billion of taxpayer money without affecting - well, taxpayers.

That $700 billion figure is misleading. Some fraction of the devalued mortgage portfolios will be written off, creating a claim on the government that could be monetized by the Federal Reserve. Some other fraction, should the Congress present a bill to the President, will be recovered at a profit.
Right now, the problem is confined to Wall Street and has not spread to Main Street. Yes, unemployment is rising and firms are shedding jobs, both here and nationally. But by any measure the economy today is in better shape than it was during 2001 recession.
Although that's true, there's still a lot of air to bleed from private retirement accounts and in occupied houses with the mortgage payments being made.

That doesn't mean we're out of the woods. But what should a concerned person do?

If you were managing your finances prudently before the crisis hit, then don't do anything differently. Prudence is a good rule in general and an iron rule during an emergency.

And this is not a good time to panic. No one makes good decisions while panicking. So take a deep breath.

If this crisis does nothing else, it should remind us to stick to the fundamentals: Don't buy things you can't afford. People facing foreclosure on homes whose mortgage is costing half their income are learning this the hard way. Fortunately, there are few of these in Vermont.

Only go into debt for things that last a long time, like a house or education. Don't take out a home equity loan to buy a new wardrobe or a Caribbean vacation.

Save for short run needs in a safe, liquid asset in a bank or money market mutual fund. After last week's government backstopping of all money market funds, that's now even simpler.

Invest for the future in a diversified portfolio of stocks and bonds - preferably in a low-cost broad-based indexed mutual fund. During the dot com bubble of the 90s, people with a diversified portfolio didn't gain as much as the investors who bought into tech stocks, but when the bubble burst in 2000, tech stocks went down the drain.

Don't try to beat the market. If we have learned one thing from what's going on, it's that you only get high rewards for taking high risks.

How concerned should we be? It's a cliché to say that the U.S. economy is fundamentally sound. But it is. We have a system of laws and institutions that have given our economy the flexibility to adapt and withstand unforeseen shocks. That's been true in the past and it is just as true today.

We've also written and rewritten the rules, sometimes in response to past crises, sometimes in response to unanticipated consequences of crisis management. Check out the recriminations over repealing Glass-Steagall, or for that matter, the recriminations about the Community Reinvestment Act whose role, if any, in the current troubles will be material for numerous dissertations, not limited to economics.

In the near term, the financial crisis will likely cause the economy to cool and even retreat a little. People should be prepared for a period of slow economic growth and maybe even a recession.

But this, too, shall pass. The economy will recover, the stock market will rise, and those of us who have kept to the basics of our financial plans - however simple or sophisticated - will be rewarded.

Should the policymakers not destroy the opportunities in their attempts to save them, that is.

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