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Financial Crisis: What Should You Do?

September 19th, 2008 | by Ken Grandlund |

It’s no longer an open discussion-we are in the midst of the worst financial storm since the Great Depression. And it’s not even close to being over, despite the exuberance on Wall Street following the announcement of a federal bail-out for the flimsy mortgage market and other financial institutions. Make no mistake about it kids…this storm is only just heating up. Investment brokers and financial institutions now have no real idea what they have on their own books waiting to implode, and even the fed can’t say with any certainty if their bail-out will be able to stop the bleeding. No one can, because no one really knows where all the bad debt lies and who’s holding the bag.

The reality is this-federal policies opened the door for financial mismanagement. Poor federal oversight fostered an environment of predatory lending and corporate malfeasance. Cheap federal interest rates kept the door open. And gross federal spending debased the value of our currency. So now the federal government has to try to clean things up. And while those who exploited the spirit of capitalism to its worst degree are lining up to get a free pass through the federal bail-out, the rest of us Americans will be holding the bag.

What’s a poor working slob to do?

To begin with, there is no guarantee that this massive taxpayer bail-out will stop the bleeding. It’s too soon to tell, despite the joy at the stock exchange. So widespread are the “toxic” loans that it may take years for the final damage to be seen. Right now, the rich investors, the big financial companies and the big corporations are in CYA mode-cover your ass. And to the extent that you can do so, you should be doing it too. I’m no financial wizard, but over the last few days, I’ve talked with some folks who know a lot more than I do and their advice is simple-you’ve got to preserve your capital.

Easier said than done, right? Especially if your capital consists of your paycheck and a small bit of savings or retirement accounts. Still, there are some steps you can take.

If you have a 401k account through your work, now is the time to reallocate how those funds are invested. The volatility of the stock market and the unknown factor of corporate investments backed by toxic mortgage debt means that the market will continue to swing wildly, meaning that funds invested in heavy stock portfolios may well take more hits. For the safest investments available, look for something concentrated in liquid assets. This type of money market fund (now insured, temporarily at least, by the Fed) has a lower potential rate of return, but also a lower rate of risk, at least in theory. (It is considered to be much safer than a stock market account, though if the government itself falters all bets are off.) Keep a good chunk of your 401k money in this kind of safe account for the next 3-6 months as things shake out-longer if necessary. You may not get great growth, but you won’t lose every contribution you make to the 401k. Similarly, you may be able to transfer money from one fund to another. If you have several thousand dollars sitting in a high risk stock fund, get it out and move into the lower risk money market accounts. Preserve what you can by reducing your exposure to risk.

If you have high credit card balances, find a way to pay them down. As credit card issuers realize their own failing bottom line, they are going to increase their fees and interest rates to recoup their bad investments, and they can up your rate anytime they feel like it. If you’re lucky enough to still have a home equity line, transfer the credit balances there- you’ll improve your monthly cash flow by reducing your monthly payments and the interest you’ll be paying on the debt can be written off at tax time. I know this will increase your overall mortgage debt at a time when refinancing is tough and home values are declining, but on the other hand, the Fed is putting together plans to help troubled mortgages too-so in the long run, it may be easier and more feasible to get a reduced or re-negotiated home loan than to dig your way out of a credit card nightmare. And the extra cash you’re not paying the credit companies can be invested in a CD or put towards the mortgage payment, reducing that debt. (Or you can just stuff the money in a jar and create your own personal liquid fund.)

Speaking of mortgages, remember this very important piece of information: it may well be likely that no one really knows who holds the actual deed or note for your home. The crisis in the economy is intricately tied to mortgage loans that have been sold, resold, split up, sold again and so on and so forth. Your actual home loan may now be owned in pieces by several “investment vehicles” meaning its hard to determine who actually holds the note. And without that bit of clarification, there may not be a single entity with the legal power to foreclose if you get behind on payments or have a reset rate inflate your monthly payments. Knowing this gives you power and some protection if a foreclosure is actually started against you. If a bank or lender can’t produce the note, they may not have standing to throw you out.

You have to understand that things are still going to get ugly, financially speaking, and you’ve got to take action to protect yourself. Sure as hell, the bank and government isn’t looking out for you as an individual. The banks are trying to stay solvent with the aid of the government and the government is trying to keep the whole house of cards erect. Sure, we all benefit if the economy improves because of these actions, but we’re still the ones holding the bag and we’ll be paying off this crisis in higher taxes and fewer services for generations. And it may yet still come tumbling down.

Finally, be realistic in your expectations. Photographs of cheering traders on Wall Street does not mean the hard times are over. Those same faces were all in frowns this week too. Bold speeches from federal officials only seek to calm the fears and boost confidence in the markets, but until the plans are in place and they actually start working, the financial picture is the same as before-gloomy indeed. Today’s federal resolve gives no cause to break out the bubbly-all it did was offer a possible lifeline.

(Remember, I am not a financial advisor or economic genius. I’m sharing advice that I’ve received from others and can give no guarantees about anything. You do what you think will best preserve your assets. )

(cross psoted at Common Sense)

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  1. One Response to “Financial Crisis: What Should You Do?”

  2. By rube cretin on Sep 19, 2008 | Reply

    Came back early from my hike because of the financial mess. Having a few financial assets i needed to talk to a few folks. in addition to the very good advice you offered a few additional observations might be helpful.

    1. Keep a stash of cash on hand at all time. this past week i was in north-western north Carolina when this thing began to break. you could not find gasoline other than for cash. Me i always have 10 k or so close by so i did not have any problems. observed several folks trying to use credit cards, but the proprietor was not interested. (by the way, the value of the dollar is in real trouble.)

    2. learn to grow food. if you have sun it is not difficult. One of the most valuable assets you will possess in the future. also, learn a skill that provides basic necessities. Many accountants, lawyers, and bankers are going to be replacing the illegal aliens soon. the illegal immegration problem is about to be solved.

    3. Make friends. Be careful, many folks are free loaders. select them carefully for skills, attitude, and character.
    Family is good, but many a person has been screwed by a family member.

    4. Assume the absolute worst. I’d rather be prepared and wrong than unprepared and right. the demographics, energy, environment, and financial situations in the world today are all peaking at the same time. Its a perfect storm and the future is not bright if soulless materialism is your life goal. Get thee to the non-discretionary side of the ecomomy. Just the essentials. forget the vanity shit. This means the things you invest in, purchase, or consume.

    During the next generation or two we are going down from 6.7 bilion to about a billion on the planet. Study Buddism. If you can learn to deal with the fear and desire stuff everything is going to be fine.

    cheers

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