Friday, September 26, 2008

Disco Mom Goes All Financial On You (GAFOY)

Ed's a smart guy. He's also got a degree in finance, just finished three years with an investment bank on Wall Street, and owns a natural curiosity that spurns him to read and learn about things he's interested in: namely, elk hunting and finance. I'm no dummy either, but from an early age I've had an aversion to anything political, government or business related. Which, I see now, has put me at a mighty disadvantage to live and function in the world as an adult. With a big deal election coming up and the economy in an unprecedented state of chaos, I'm trying to catch up.

Two of my three siblings have expressed to me harsh distaste for political blogging (not that I could or would anyway), so, at the risk of making an idiot of myself, I go straight to finance.

Over the last three years my economic knowledge and understanding have increased through long discussions with Ed, so I have had a much better context for current events that I otherwise would. And with all that has been happening lately, and the addition of seeing Ed more often, our discussions have become longer and more frequent. Sometimes he emails me articles during the day and we discuss them at night. Sometimes I catch a financial blurb on public radio while running errands and - oh, rare but exciting joy of joys - get to tell him something he didn't know. Through our discussions I've gained a little confidence, enough to occasionally posit a thoughtful question or propose an idea or connection. (Of course they are usually things he has already thought of but he is very patient with me and gives me the praise I require for using my brain.)

So, no, I don't have any surprise economic analysis to share, and I wouldn't presume to be able to teach readers something new. The national and global economies are complex and I'm still learning. But I can share a few things that have been helpful to me.

There are three main parts to the current economic situation:

The Past,
or how we got here. This article from 1999 about Fannie Mae's acceptance of subprime loans gives a brief but haunting report and prediction. The author, Steven Holmes, has every right now to say, "I told you so." It suggests political pressures to get everyone the American dream of home ownership, whether they can afford it or not, as one of the causes. But this Seeking Alpha article, The Great Consumer Crash of 2009, has been the most helpful to me so far, in laying out in charts and brief numbered points how the hell it got so bad. And what's happening now as a result. My favorite quote, "Only when the tide goes out do you discover who's been swimming naked."
Conclusion:
Americans have been allowed to live on too much credit, and that can't go on forever. Eventually you have to pay the piper.

The Present,
or what's happening now. Again, The Great Consumer Crash article does a good job explaining this, though it's just one man's take, and certainly too simple to include everything. But it's a good start. Ed says it's a more pessimistic view than many analysts are willing to admit yet, but I think more and more are coming to that side every day. No one wants to cause panic, but I'd like to know, expect, and plan for the worst, personally. Last night Ed and I sat in our living room and listened to an hour-long BBC radio broadcast debate, "World economy on the brink?" We felt like we were back in the olden days, sitting by the fire listening to radio programs to learn what's happening in the world. But despite jargon I had to have Ed explain later, like leverage, recapitalization and contra-cyclical, it was well done and helpful. Ken in Hong Kong was especially insightful if only the moderator wouldn't have interrupted him so much. At one point they were discussing "who's to blame" for how we got here, and I was surprised that all blame was laid on the government and the banks. Not a single panel member mentioned the individuals living grossly beyond their means to be at fault. I wonder if the economy can ever stabilize until people become responsible and accountable again for their own finances, and learn to live and save within their means.
Conclusion: It's bad. No one knows what will happen next, or exactly how many of the wheels in motion will play out. In the least, several waves of ripple effects are still expected.

The Future, or how we can recover. Of course the President's bailout plan is on the table. Ed did a good job explaining this to me in terms of the savings & loan scandals in the late 80's and early 90's, of which I was completely oblivious. It worked then, but the scale now is monstrously grander. Everyone has an opinion - again the BBC radio show addresses this - but the reality is that the situation is unprecedented. A bailout could work or not work. The economy could swing back or fall deeper. Whatever happens, America is facing a recovery phase, and we have already dropped out as the global economic power we once were - Asia is king now, though I don't know exactly what that means. I asked Ed what the chances are of falling into another Great Depression and he pointed out that there are things in place, like the FDIC, that are supposed to keep that from ever happening again. But they are being tested, and will be tested further, and we can only hope they will hold up. Unemployment is at about 6.1%; during the Depression it was 25%. But life back then was more rural, and people found ways to survive. With our current two-income, commuter workforce society, it's hard to say what will happen if more people continue to lose jobs, lose health insurance, and lose homes.

Howard Marks is chairman of Oaktree, a large money management firm. He frequently writes memos about financial things as he sees them to Oaktree employees and clients, and those memos often get forwarded and passed around Wall Street and financial people. His views are insightful and well-respected. His most recent memo, dated Wednesday, explains the bailout, and it's worth reading.
Conclusion: If we haven't already, start tightening the belt. Lose the consumer mentality, cut expenses, save some money. Live within our households' means. Rough seas ahead. Words like meltdown, panic, crisis, collapse and worst ever are being thrown around.

For members of The Church of Jesus Christ of Latter-day Saints, none of this should come as a surprise. Our leaders have been telling and warning us for years, in fact decades, to live providently. And not just for kicks, but for safety and security in an unpredictable world, the world in which we now live. Elder L. Tom Perry's 1995 talk, "If Ye Are Prepared Ye Shall Not Fear," and Elder Jospeh B. Wirthlin's 2004 talk, "Earthly Debts, Heavenly Debts" are just two examples of the constant counsel we have been given, and hopefully taken.

It's a fascinating, if confusing and scary, time to be taking home-based Econ 101. But, knowledge being power, I'm trying hard to understand as much as I can so as to be a responsible citizen and steward of my family.

Got comments? Please share - I'd love to learn from you.

Got questions? Call me. I'll give the phone to Ed.

8 comments:

jennie w. said...

I've been lurking--I don't think I've ever commented, but I can't actually remember.

Anyway, I really appreciate this because I have felt really clueless about this whole issue lately. Is the bail out good? Bad? What's the point? What does this mean for me?

I plan on reading all of those articles. Thanks!

Shells said...

Dave and I have no clue how bad it is since we rarely listen, hear or see anything related to US politics, news, finance, etc. But, even we have noticed an increase in coverage of it here. The UK thinks they are about 3 years behind the US. Their housing market is just beginning to fall. Luckily I work for the government and my job is stable, for the foreseeable future. I am really glad that we have listened to guidance from church leaders and fiscally responsible people. We don't have any debt other than our mortgage, and we save what we think is a decent amount, but we could definitely lower our consumerism and teach our kids the importance of being frugal to prepare for any eventuality.

Mo said...

Allow me to thank you profusely for discussing this financial mess without using the current media buzz words that make me nuts and bring me to the brink of hyperventilation (i.e. meltdown, disaster, armageddon, etc.) The reality of all of this has been a bit much to take at times and I appreciate your measured redux. (And thanks, Ed, for your contributions!)

Rather than yield to my ever-present sense of panic, I have been trying to continue to prepare for the worse-case scenario. (It's a bit pessimistic, but it doesn't hurt!) While I can't work at the moment if I still want to be with my girls AND finish my dissertation, I CAN work toward building up our storage of necessary but often expensive items like paper goods, food, etc. With apocalyptic words swirling around like leaves in a wind storm, I need to feel like we could get along with just what we have in the house for a couple of weeks if the need arises. I am also getting to know my Slow Cooker a lot better these days! (And would love some suggestions to broaden my repetoire if you've got any!) In truth, I've been amazed at how much we've been able to live without, and how much I can save on things we do need if I look hard enough.

As a whole, I've been overwhelmed with gratitude for what we DO have in the midst of this economic mess! Even if we can't seem to pay off Dave's student loans fast enough!

dave said...

Even before I got to your conference talk links, this had me thinking of two famous discourses:

1) The Mediator, by Boyd K. Packer, which many of us know from its short-film adaptation.
"There once was a man who wanted something very much. It seemed more important than anything else in his life. In order for him to have his desire, he incurred a great debt.

He had been warned about going into that much debt, and particularly about his creditor. But it seemed so important for him to do what he wanted to do and to have what he wanted right now. He was sure he could pay for it later.

So he signed a contract. He would pay it off some time along the way. He didn’t worry too much about it, for the due date seemed such a long time away. He had what he wanted now, and that was what seemed important.

The creditor was always somewhere in the back of his mind, and he made token payments now and again, thinking somehow that the day of reckoning really would never come.

But as it always does, the day came, and the contract fell due. The debt had not been fully paid. His creditor appeared and demanded payment in full.

Only then did he realize that his creditor not only had the power to repossess all that he owned, but the power to cast him into prison as well.

“I cannot pay you, for I have not the power to do so,” he confessed."

Wow, doesn't that sound like the article you linked to. Carrying the analogy forward, is the bailout plan the equivalent of the Mediator in the story? Discuss.

2)A talk given by President Hinckley during Priesthood Session of the Oct 98 Conference, which I remember very keenly and have reflected on many times in the decade since I first heard it. I reflect on it still, and have tried to live by its advice. It was exactly the kind of guidance I needed to hear before starting a family of my own.

Thanks for posting this, Kari - its been extremely enlightening.

tona said...

Terrific post, thanks Kari, lots of good resources. I hear so much overblown rhetoric about it all that it's nice to have some places to go that seem trustworthy to sort it all out. I especially am intrigued by what comparisons people see and don't see with the 1930s in the US, since I will be teaching my survey students about the Great Depression in a few weeks.

I did see a blog post on one of the LDS blogs in the last week or so that argued whether the bailout meant that we were "privatizing the profits and socializing the losses" in the financial markets, and I've been pondering that phrase for a while and wondering if that's true, and if so, whether that says something rather fundamentally different about our economy now than what it used to be. Our govt seems to take on so much more assistance of all kinds than it did or could before - I know we have the New Deal and the Great Society to thank for that, so it's purely a development of modern life, but it just seems to be getting worse (or maybe Worse isn't the right word...). Folks down in Houston seemed not to have bought bottled water or nonperishable food ahead of time, but sat and waited for FEMA after that hurricane (which had been forecast for over a week) and then complained when they didn't get 3 hot square meals a day as a free handout. I know that disaster relief and financial market stabilization aren't the same thing, but there's something related about the expectation that the govt will provide from its currently-empty pockets that I find unsettling.

Adam W. said...

While we are all supposing what is to blame (and I agree that Fannie/Freddie getting into subprime was the beginning of the end), I think one of the fundamental problems with America right now is that a large portion of Americans do not pay income tax (32% according to: http://www.taxfoundation.org/research/show/542.html)

What does that mean? That a solid third of America has no problem asking for more from the government, knowing that nothing more will be asked of them. War in Iraq? Sure. Universal health coverage? Sure. Big fence along border with Mexico? Sure. Medicare, Medicaid, Welfare,...? Sure. Sure. Sure. We know it won't cost us any more, so why not get more?

You are absolutely right that the problem comes down to living outside our means.

The prophet's counsel has served us well again. Side note, our stake president in Ashburn was particularly focused on the issue of living within our means back in 2006 - at the height of the boom.

Adam W. said...

Dave,
I just have a hard time with comparing the bail out (gov't) with the Mediator (Christ).

Gov't cannot restore all to a perfect state as Christ can (though we'd like to think that it can).

I think a more appropriate analogy is what has been happening behind the scenes with individual home owners as their adjustable rate mortgage interest rates jump and their monthly payments become something that they no longer can afford. Yes, they knew the date would come. Yes, they thought they had enough time (to sell the home at a profit, to get a pay raise, etc), "But as it always does, the day came, and the contract fell due."

In many cases (though only in this downturn), loan holders have been negotiating with homeowners to avoid another foreclosure.

But this too is a flawed analogy since that would make the creditor the merciful one.

I'll keep thinking...

MiaKatia said...

I am with Mo, this whole conversation brings my total anxiety, but I do appreciate your and Ed's condensation of the whole situation. When I have a few spare moments I am going to go back and read those articles so I can have a better understanding. Thanks for doing the research for me ;)

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