As Bob Dylan sang in the 1960s, "The times they are a-changin'."
Those words are true today when it comes to our financial markets and the foundation they rest upon. Major financial institutions and corporations have endured unprecedented changes in recent months. Let's review:
- Three of the five largest financial institutions on Wall Street are gone: Bear Stearns, Merrill Lynch and Lehman Brothers. Goldman Sachs and Morgan Stanley remain.
- The two largest mortgage finance lenders, Fannie Mae and Freddie Mac, are now government-owned. (The government offered a bailout plan in exchange for ownership of both firms.)
- AIG, one of the world's largest insurance companies, is now government-owned. (The government provided an $85 billion loan--and a second loan of more than $30 billion--in exchange for controlling ownership.)
Stay tuned. There's more to come.
The financial world, as we know it, has changed structurally and permanently. A friend stopped me in the parking lot of the grocery store recently and asked, "Is it all going to be OK?" I smiled and said, "I don't know if it will be OK or not. But it will be different from here on. We won't be going back to the way things were . . . ever."
What Does This Mean for Me?
First, understand that the term "government bailout" really means taxpayer bailout. I'm angry that the individuals and the firms that made fortunes in fees, salaries and bonuses working the system that led to the financial crisis not only aren't being penalized for their blatant acts of greed and deception, but also are walking away with millions and billions. Meanwhile, we, the taxpayers, are left footing the bill for their incredible mismanagement and negligence.
Second, this is the most obvious (and costliest) wake-up call for individuals to take financial matters into their own hands and not depend upon the "experts" to do what they think is best with your money. The people on Wall Street, who greatly contributed to this colossal financial disaster, are supposed to be the brightest financial minds around. Are we really betting on them to get us out of this mess? Think again.
Think for yourself.
These days I find myself questioning everything I hear regarding the U.S. and global economies. Everyone has an opinion, from financial analysts to reporters and politicians. Most also have their own agenda, whether it's to keep a job or make a commission, keep their ratings high or get elected. You have to decide whether you're getting useful information or PR spin. It's up to you to separate fact from fiction.
Some people look to our political "leaders" to save us from this mess. I'd rethink that one. These people are running our country, and they didn't see this coming? Or is it that they just didn't know what to do? Either way, these leaders have led us astray.
This problem has become so big it can't be solved by a select few in Washington. It's now a global problem with countless moving parts and ripple effects being felt around the world. So if you're hoping and praying that a new president is the answer--be it Sen. John McCain or Sen. Barack Obama--once more I say, "Think again."
What Do I Know? Whom Do I Ask?
So what are you to do about all the chaos? Your best chance for financial stability today is:
- Understand what's happening economically.
- Realize what effect it may have on you.
- Take steps to prepare for it.
With so much information available, it's easy to get confused. The key isn't to let your confusion lead to paralysis. Don't decide to do nothing because you don't know what to do.
Knowledge is your greatest asset. It's the uninformed who blindly follow the politicians and so-called financial experts because at least they have an answer, good or bad. It's time to come up with your own answers, and that's why I say, think for yourself.
There are certain things we do know about the economy:
- The banking industry is shaky.
- The U.S. dollar continues to decline.
- Real estate prices are still coming down.
- The stock market is volatile, up hundreds of points one day and down the next.
- Unemployment is rising.
- Oil prices are high. Gasoline averages $3.50 per gallon.
- Food prices are up.
Questions to Ask
Instead of getting alarmed or confused by all of this, start asking questions, and take steps that put you in control of your own financial life. Here are a few to consider:
The banking industry. Begin with, "Is my money safe and protected where it is?" If the answer is yes, great. But if the answer is no, what can you do to make it safe?
You're probably aware that if your bank is FDIC-insured, accounts will be protected up to $100,000. If you have an account with $120,000 and your bank closes its doors, chances are you will lose that additional $20,000. There are programs that organize your funds so that all your money is in insured accounts.
The declining U.S. dollar. As the U.S. dollar drops in value, the money you have buys less and less. Raise the question, "How else can I hold my money other than in U.S. dollars? What goes up in value as the dollar goes down? What are my options?"
For example, the price of gold and silver tends to go up as the dollar drops in value. Instead of holding dollars, you could hold silver and gold.
Unemployment is rising. If you're a business owner, is your business doing better or worse than a year ago? Ask yourself, "What can I do to increase sales?" Are you increasing your promotion and advertising? Business owners often cut back on promotions in tough economic times, when what they need to do is step it up.
If you're an employee, have you asked, "How stable is the company I work for? Should I be exploring other options?"
Think Things Through
As a cautionary note, here's an example of one woman's failure to discount a consultant's advice and think for herself:
Debra queried her consultant: "My 401(k) was at $180,000 last week. This week it's down to $120,000. Should I stay with the 401(k) or pull out and take the penalty?" Her consultant replied, "Your employer contributes matching funds to your 401(k), doesn't she? Then keep your 401(k) and keep contributing to it because your employer is giving you free money." The client smiles, happy to have an answer to her dilemma.
Let's stop and look at the facts. Debra lost $60,000 in one week. Her employer might be contributing about $100 per month. (Her employer will need to contribute $100 per month for 50 years to make up the $60,000 she lost.) If she pulls the funds out of her 401(k), she would typically pay a 10 percent early withdrawal penalty, which would have been $18,000 when her 401(k) was worth $180,000. (An $18,000 penalty vs. a $60,000 loss--you do the math.)
If Debra took the time to think for herself she would first calculate the numbers. Then the question becomes, "Can I take the money from my 401(k) and invest it somewhere else where I can get a better return on my money?" Given that she lost 33 percent in one month, that shouldn't t be too difficult to do.
What Lies Ahead?
As this real-life economic drama unfolds, your financial stability and success will not come from the government. It will not come from Wall Street or other financial pundits. It will come from you. This is truly the time where knowledge is your best asset. These can be exciting, creative and character-building times if you question, learn, discover and implement your own answers.
If you're waiting for someone else to bail you out, think again.
But most important, think for yourself.