Apart from the few of you who have been living in the rain forest or meditating in the Himalayas, the rest of us have not only heard, read, felt, discussed, and been lectured about the current financial crisis, but may also have been fired or directly affected in some other way.
HOW DID IT COME TO THIS?...where the smartest people with degrees from the fanciest schools, legions of consultants, billions of dollars, and decades of experience PERPETUATED this biggest of all PONZI schemes? Who was asleep at the switch that keeps the lights on in the global economy? Who was steering this financial Titanic when the looming iceberg was barely a speck on the horizon? Will the real perpetrators please stand up?
Alas, for many people looking to lay blame, the answer is close at hand. Go look into a mirror and stare really hard at the cause of this monetary destruction. If you took out a no-doc loan that you couldn't afford, if you were flipping homes or real estate feeling really good about yourself because real estate can only keep going up, if you ran a bank and turned on the risk to goose up your profits, if you were in elected office and could have raised the alarm but kept the party going because of increasing state or local revenues. The list goes on and on....right from the highest levels of governments and central banks that didn't tighten regulations, the insurance companies and brokerage firms that repackaged and sold these mortgages, to the end consumer who went out on a limb and gorged on cheap debt by loading up on expensive houses, cars, and other consumer goods.
The interconnectedness of the global economy only exacerbated the problem. Countries with high savings rates and therefore surpluses were only too eager to purchase the safest currency in the world - US Treasury debt. And the cycle inexorably continued, as domestic banks awash with cash, low rates, and light lending terms distributed it to a voracious public. I'm reminded here of the John Donne line,
"Each man's death diminishes me,
For I am involved in mankind.
Therefore, send not to know
For whom the bell tolls,
It tolls for thee".
To a greater or lesser degree, a lot of us contributed to this mess, and we're the ones who'll need to pull ourselves out. There is no other way. We cannot depend on the $700 billion bailout, the next President, elected officials, company bosses, or family members to pull us out.
For the lay person, I would recommend a back-to-basics strategy. Read and re-read George Clason's timeless classic 'The Richest Man in Babylon'. This book encapsulates the most basic tenets of financial prudence. In fact, it ought to be mandatory reading for all school students, and maybe even for adults. A little re-education might not be so bad after all.
Keep a cash reserve on hand. I would recommend about a 6 month to a 1 year reserve.
Re-evaluate your savings goals, your expenses, your 401k contributions, and other investments.
Simply put, spend less, save more, especially if you're used to maxing out those credit cards.
Although it might be difficult in the current economic environment, seek a part-time job or extra hours at work if possible. Enroll in a class to learn new skills or go back to school for a new degree.
It is tough in this time of dire need not to want to lay blame and punish those responsible. That will come, hopefully, in due time. And the clean up is not going to be easy, cheap, or painless. There needs to be more bloodletting and I predict more despair before this is over. But, humanity has suffered greater tribulation, and we'll emerge from it stronger, wiser, and more resilient. Hopefully, we don't lose the humanity in us along the way.
Zubin J. Bomanshaw
Integrity Investment Advisors, Inc.