What the financial crisis means for consumers
Regular folks like you and me are wondering - I mean are scared shitless - about what the financial crisis means for our savings. How will the meltdown of the Dow Jones, which fell 504 points yesterday, the bankruptcy of Lehman Brothers, and the sale of Merrill Lynch affect us?
A story from McClatchy Newspapers answers some of the basic questions.
"What does all this Wall Street volatility mean to me? If you have a 401(k), shield some of your income from taxation through an IRA or a lot of your retirement savings are in stocks, you've already seen a sharp drop in the value of your nest egg. The Dow Jones industrial average is on pace for one of its worst years ever, but even if you've parked your cash in a bank, today's rising inflation is eroding its value.
"Will the collapse of Lehman Brothers make things worse? With the government-brokered sale of investment bank Bear Stearns in March, Bank of America's absorbing of Merrill Lynch and the bankruptcy filing by Lehman, Wall Street's weakest players have been pushed off the field. Goldman Sachs, Morgan Stanley and JP Morgan remain the biggest traditional investment banks, and Merrill is expected to keep operating under its own name. The consolidation in investment banking has taken most insolvency concerns off the table, and over a longer horizon this could point toward a return to stability.
"What about the shorter horizon? The chief executive officer of Bank of America, Kenneth Lewis, said Monday that he didn't see the clouds parting...
...for his industry until 2010. This financial crisis is still rooted in bad mortgages that were packaged into bonds and sold to investors. As long as home prices keep falling, investment and commercial banks that own vast piles of those bonds will keep taking write-downs and their bleeding will continue.
"How do these banking-sector problems affect me? Problems in the banking sector spill into the broader economy. As these complex Wall Street investments sour, banks need to keep more capital on hand to assure investors that they can weather any future losses from loan portfolios. That means banks are playing defense. If you want a business loan, a car loan, a home loan, a student loan or virtually any other kind of loan, they're hesitant to lend, lest they wind up with more bad loans. With lending drying up, auto dealers are sitting with inventory they can't move and real estate agents are showing homes they can't sell. The economy is slowing as credit is squeezed.
"Is there any good news for consumers? Yes. One immediate consequence of Monday's Wall Street earthquake is that oil prices sank sharply as investors fled anything considered a risky bet, despite Hurricane Ike's disruption of oil facilities in the Gulf of Mexico area. The price for contracts of next-month deliveries of oil fell almost $6 a barrel. If prices stay lower than $100 a barrel, inflation pressures should ease substantially. That means gasoline prices should drop in the weeks ahead. Another positive is that pressure is building on the Fed to cut already historically low interest rates. It could happen today, when the Fed's rate-setting Open Market Committee meets, or it could come in October.
Another story, this time from MarketWatch indirectly answers one other question you may have (I know I do), which is should you stop contributing to your 401(k) and/or sell your stocks?
"It's too late to panic," said Zachary Karabell, president of independent consulting firm River Twice Research. "And if it's too late to panic, it's probably time to calmly look at what's going on in light of opportunities."
"Selling doesn't recoup your losses," he added. "It just realizes them."
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About The Bargain Hunter
Daily News staff writer Julia Scott loves to find bargains on everything from groceries to Gucci. Her tips will help keep your hard earned cash where it belongs - in your pocket.
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While I don't have investments spread out all over the place, I do have my meager investments with AIG, which was in the news today as one of the latest companies in financial trouble. Therefore, I'm concerned, although not panicky. General wisdom holds that sitting tight and weathering financial storms is usually (and I emphasize the "usually") the best practice, so I try to keep that in mind. However, I'm not a financial genius, so I'm relying on my advisor to keep me informed. I'll be interested to see what others have to say about all this.
I don't have any huge investments, but what little I do have is mostly with AIG. I'm watching with bated breath to see what happens following word of a huge government loan. I'm not panicky, but I am concerned. I'm just lucky that my mortgage is almost paid off, and that I don't have to worry about a car loan. Living on a pitiful teacher's pension ain't easy!!! I lost all Social Security benefits when I retired.