Monday, September 29, 2008

The Spirit of Money

I have been following the news of financial crisis just like everyone else this past week, trying to keep up and make sense of it all.

Two basic points have emerged from talking with people who have a closeup view of the situation:
One is that money just can't stand still. What everyone's afraid of right now is a credit freeze where people are afraid to lend to each other. A money market fund, in fact, the company that INVENTED the money market fund--a low-yield investment vehicle based on very short-term securities, which was until now considered as safe as cash--"broke the buck" because of Lehman Bros.' bankruptcy, and it had to freeze withdrawals as well. Overall holdings of money market funds had risen more than 10 percent this year because nervous investors were taking their money "out of the market"--but now they find that the money funds aren't truly safe either.
It's enough to freak anyone out. If you hold your money in paper (cash), it loses value at the rate of inflation. If you deposit it in a bank, you still probably won't beat inflation, plus the bank could fail, but at least you're insured up to $100,000 by the FDIC. If you buy gold? Well, gold's gone up a hell of a lot this decade.
Other than chaotic bear markets like this one, the responsible thing to do has always been to put your money, any savings you don't need right away, to "work" for you in the market, which people now realize basically means lending it out at interest.

You have to risk something, but as the money market incident shows, we don't really always understand what the risk is. Neither did the experts.

Which leads to the other point: our entire system of money is based on social trust. Why is it that the federal government can come up with the cash to bail out the financial system? Well, the federal government can borrow money at extremely low rates--in fact, at one point last week people were practically PAYING the government to hold onto their money (Treasury bond yields went to near zero).
Why can the government borrow at such low rates? Because people around the world believe that the government will make good on its debts. How will it make good on its debts? American taxpayers will keep paying their taxes. How do we know people will keep paying their taxes? Because this country's been going along with the rule of law for about 300 years now, and at least within our borders, the law means something. Contracts mean something. Promises mean something. That's what it's all based on.

So, how much do you trust the people in charge right now?

Tuesday, September 23, 2008

For Marci and Doug...And Everybody Else

Thanks to Colby Community College for an unusually warm welcome last night. Here's some of the resources I mentioned: is a nonprofit providing information and advocacy for Generation Debt. is a free online money management and budgeting tool. Geezeo is another one.

SmartyPig is a way to start saving online at a pretty good rate (3.9% APR) and to get help from family and friends.

Save Now or Die Trying is a book by Mark Bruno about retirement planning for young people. Here's a Yahoo! column I wrote about the book. is THE site to get your free credit report as required by law, to take a look at what old debts you may have and start to get them in order. You can look up all your old student loans here.

The Freelancers Union provides health insurance programs and other resources for freelancers.

If you need to consolidate a student loan, try a Direct Consolidation Loan. To understand the new Income Based Repayment programs that make student loan payments more affordable, go here.

Monday, September 22, 2008

"End of Capitalism as We Know It", Heroes

I've never seen the show, but for those of you who are fans of "Heroes," NY Times television critic Alessandra Stanley offers a fascinating (to me, anyway) analysis:

"Young people today can’t repay their college loans; they can’t afford apartment rents, let alone mortgages; their Social Security is being sucked up by their elders; and H.I.V. left them out of the sexual revolution: what was once free love is now a viral minefield. It’s a plight lamented in books like “Generation Debt” and even in ads for that showcase debt-crippled lads gamely doing menial work as they warn others about the dangers of letting bills pile up. (“They monitor your credit and send you e-mail alerts/So you don’t end up selling fish to tourists in T-shirts.”)

“Heroes” gives its fans cathartic validation: You inherited a screwed-up world, and it’s not your fault."

I don't think I've ever written about being upset that we missed the sexual revolution, but that's cool.

In other news, here's a simple, amusing analysis of "the end of capitalism as we've known it":

"Besides the existing regulations, look for a slew of new rules to hit the Street, starting with more transparent accounting.
The regulators will want to see how much leverage these firms employ and their sources of funding, to name two items at the top of their list. Off-balance-sheet activities will come under the regulators' magnifying glasses as well."

Thursday, September 18, 2008

Destructive Growth

Steven Pearlstein of the Washington Post:

" What we are witnessing may be the greatest destruction of financial wealth that the world has ever seen...In the end, however, there is only so much the government can borrow and so much the government can do. The only other choice is for Americans to finally put their spending in line with their incomes and their need for long-term savings. For any one household, that sounds like a good idea. But if everyone cuts back at roughly the same time, a recession is almost inevitable."

The categorical imperative, the writer reminds us, doesn't hold when it comes to saving and spending. If everyone lives within their means, that's bad for growth--which is the American dream, as we've historically defined it.

However, let's take a step back. As more and more people are finally, traumatically, being forced to realize, the single-minded pursuit of MORE bad for children and other living things. It's bad for families to spend more than they make and to forgo savings in favor of momentary pleasures. It's bad for other living things because in our current economy, economic growth is based on unsustainable practices of resource extraction, of fossil fuels and every other natural resource.

I hope I'm not a bad citizen if I'm more worried about the survival of our civilization than about the health of the US economy--more worried about a Cretaceous-level mass extinction than about a Depression-level financial crisis. The best experts tell us that both are at stake here.

Crises create opportunities. The opportunity here is to create a sustainable economy. Growth as we know it (drill, baby, drill! Drive up that S&P 500!) has to be replaced by truly intelligent design and sustainable development.

Wednesday, September 17, 2008

Investment Advice: Don't Panic, and Don't Listen to Advice

Gawker has a good bit of media criticism posted today on how the big business magazines, in relatively recent issues, touted stock in AIG, Merrill, and Lehman Brothers. (Nationalized, fire sale, and bankruptcy, in case you haven't been following the news.)

This goes to reinforce the idea that it's not so smart to read magazines for stock tips. I am really glad that the business magazine I work for doesn't tout stocks, because the whole idea is irresponsible. The typical small investor like you and me, trying to grow her nest egg, shouldn't even be buying individual stocks, or really, even mutual funds. The smart long term investment is low cost index funds--period.

On the other hand, I've heard from friends and acquaintances that they are panicked by what's going on and want to get out of the market altogether. This is understandable, but it's also the wrong idea. I'm not even going to check my performance for the next few weeks, although I am reallocating investments to make sure I'm diversified.

The secret to successful wealth building is to live beneath your means, save, diversify, buy, and hold. You definitely want a solid rainy day fund in CDs and FDIC-insured savings accounts (AKA cash), but if your retirement is more than 20 years off, it should be a small proportion of your total assets. You have to stay in the game or you'll miss the comeback.

Monday, September 15, 2008

What are the fundamentals of an economy?

John McCain earlier today: "Our economy, I think, is still -- the fundamentals of our economy are strong, but these are very, very difficult times,'' McCain said."

Leonard on sharply points out that this is effectively nonsense. "Unemployment is at a five-year high, consumer spending is predicted to decline this fiscal quarter for the first time in 17 years, and we are currently undergoing the worst housing bust since the Great Depression."

Gas prices. Health care costs. Wall Street nightmares. Our ailing infrastructure and our limping cities.
Our shrinking manufacturing base and the implosion of Detroit. Looming consumer debt.
If you're talking about actual economic fundamentals, the immediate nuts and bolts of building prosperity, the picture is very, very, very dim.

However! While he is not my choice for president, I think McCain's statement has a little kernel of validity.

We still have a growing population, a world class higher education system, a democratic, entrepreneurial society, and a wealth of natural resources like agricultural land and water. These leave us better positioned than many other nations out there, including the BRICs who are supposed to be the new superpowers, to face down the scary 21st century global economic threats of massive social unrest and global warming.
We need much better approaches to managing our human capital and our natural resources over the next decade. We need a better social safety net, improved education policies, and sustainability measures, aka the new carbon economy. This will determine whether America will see renewed prosperity or will muddle through a "long emergency" of breakdown and even chaos.

Friday, September 12, 2008

Washington Post on Ideology Meets Reality : Market Intervention Time!

The government now finds itself hip-deep in the direct management of the financial system, rescuing four of the country's biggest financial institutions -- Bear Stearns, Fannie Mae, Freddie Mac and now Lehman Brothers -- from the harsh discipline of markets and the consequences of their own misjudgments. ...
As with the Great Depression, it has taken a full-blown financial crisis to shake the faith that free markets will always deliver better outcomes than politicians and bureaucrats.

Thursday, September 11, 2008

Spend It While You're Young?

Over the past year my husband and I have been working to get our finances more coordinated. We had an initial free consultation with a financial planner, which gave us confidence that we're doing a pretty good job living within our means. And the other night, with our big vacation over and summer ending, we sat down together to take a fine-toothed comb to our everyday expenses, using (which I joined over a year ago) and Citibank's online statements.

It was a surprise! I'm a pretty good saver, both for retirement and rainy-day savings, but I actually spend a lot more than I realized. Specifically, since I started my first regular job in January, I've increased my spending quite a bit on health and personal care--things like yoga classes to deal with stress. I also spend a bundle on groceries--far more than on restaurants. (Hello, Whole Paycheck). Adam's biggest item after rent was travel.

We're going to keep checking in over the next few months so we can develop a really good budget, and in the meantime, I'll be keeping an eye on expenses. (For example, I'll be making more trips to the municipal gym, which costs just $37.50 for six months unlimited, and fewer yoga classes at $14-18 a pop). But the best news we both got from doing this exercise was that our spending is pretty much in line with our stated values. We value experiences (a pedicure with Mom, a ski trip with friends) over stuff.

According to Slate, research shows that spending money on the good things in life when you're young and healthy makes you happier than when you're old and/or sick. I believe in living within my means, but I don't want to feel deprived.

" If money isn't going to bring you as much happiness in your old age, that's further reason not to oversave. If you've always wanted to samba till dawn in Rio or see Angkor Wat at sunrise, do it now, when you're healthy and you know you'll still enjoy it."