Everyone Wants Answers to the Crisis

Not a day goes by that there isn't another headline about what's happening with the credit crunch and the world's financial crisis. Lately, it has been the Fed lowering the interest rate that's a record-breaking low. Credit card companies are getting hit with new rules and we still don't know what's going to happen with the auto industry.

There are dire predictions that things are going to get worse next year and who knows where we are heading. There doesn't seem to be a sector of the economy that's safe. If you have something to lose: job, card, lines of credit, you could be vulnerable. Don't leave out those of us who are renters. We could be caught by the short hairs if our owners aren't keeping up with their mortgages.

So, now that we have heard all the bad, what do we expect? Do the forecasters know what they are talking about? Is it as really as bad as it sounds?

You need to do a reality check when it comes to the forecasters. No one has a sure answer to anything, no matter how many credentials they have after their name. For one thing this situation is very different than what turned into the depression. Those folks didn't have bucketfuls of debt. So they didn't fall down as far as we are capable of. There is a great big difference between having a zero balance in your account than having a minus $200k. Unfortunately, we have a lot of people currently in that category and more. We have dug bigger holes.

So here it is: crystal ball gazers are guessing. And as admitted by them, things are different than in the 1930s. Actually, ‘things' are different than they have ever been before. So far the regulators and the Feds are doing all they can based on their present knowledge/economic model. What they are doing should do the trick eventually. Whether or not any other crisis will come along to slow down recovery isn't known. Keep in mind, also, that these decisions, putting cash into the banking system, i.e. don't change things right away.

However, the announcement regarding the bailouts throw out a positive message to all those lending money, small business owners that are trying to figure out whether or not to expand and those in the stock market. The overall result is more stocks being sold, businesses expanding and consumer retail sales slowly moving up. These effects are referred to as ‘increased confidence in the economy.'

However, the overall effect of more cash in circulation may not trickle down to the rest of us for a few years. I had one professor who explained it this way.

All of the above is describing the current problem regarding the scarcity of cash and credit lines. He told the class to picture a big balloon that covers the entire country. (He was only talking about America's economy.) When someone spends or gets credit on one side of the country, it has a rippling effect on the credit market. Where that rippling effect goes is anyone's guess.

So, what can you do in the interim? Try not to listen too hard to all the dire predictions to what's going to happen next. Don't plop a large chunk of cash into: durable goods, new investments, etc. If things start getting worse, you will need all the available cash you can get your hands on. In times of stress, one needs to have a higher liquidity preference, keeping more cash available.

For investors that are wondering if there is any money ever to be made again in the market and are going nuts chewing on your nails, try a mutual fund that deals in low risk investments. Don't hand over your portfolio to anyone without doing your own due diligence. You will have to keep a keen watch.

The biggest caution is don't make long term decisions you might regret in two months. We have no idea as to what exactly is going to happen. Do not be influenced by the commentators that claim all of this is because the system doesn't work. The system works. We just had some crazy guys in charge of the money that got caught up in a cycle of greed and we weren't doing a good job of watching them.

Hopefully, we now know better.

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