Monday, September 29, 2008

We're all tied to the market's well-being

Unless you live under a rock (no offense to those who do, I hear it's a nice respite from the hot weather), the stock market plummeted today. As in, those little streams of ticker tape skimming across the bottom of the business news channels were all bleeding red today. Yeah, yeah, it seems like the stock market plummets all the time nowadays, so what's the big deal?

First we had Bear Stearns go belly up, then Lehman Bros. followed suit. Bank of America lapped up what was left of Merill Lynch, AIG was "rescued" by the U.S. government (as were lending giants Fannie Mae and Freddie Mac), and most recently, Washington Mutual was acquired by JP Morgan Chase, while Wachovia was bought out by Citibank. The startling frequency that these bankruptcies and buyouts took place within was stunning. Think of what's happened in the last month or two as a giant checkerboard, with one side gobbling up the less powerful side, until finally the board's left with a few winning chips. Too bad, though, that the real thing isn't just a game.

To put things in perspective, the Dow collapsed 400 points in TEN MINUTES today -- something that normally happens in hours, if not days. By the time the market closed, the Dow had fallen 778 points, its largest drop in financial history. The S&P 500 fell 8.75%, the worst drop its seen since black Monday in 1987. Today alone, $1 trillion was vaporized in the stock market, which is almost unprecedented. You may think, "So what ... I don't trade in stocks anyway, so it doesn't affect me." Unfortunately, chickadees, it affects each and every one of us in a breathtaking amount of ways, illustrating how intricately connected each of us are to our government, our economy and, quite frankly, to each other.

How? Well, with the climactic carnage that ensued in the political and economic spheres today, loans will be that much harder to lock in, which means small businesses won't be able to borrow that much money. This leads to less jobs for U.S. citizens, which leads to less spending/saving power, and less bills subsequently paid. "If no one in the financial community trusts each other to lend money, then we're going to have a complete and total financial collapse," White House spokeswoman Dana Perino told ABC News yesterday, just ahead of the bailout proposal vote. "And that's what we're trying to prevent."

An article on Yahoo Finance was spot-on with its analysis of the credit crisis in the face of the failed bailout plan:

"In plain English, banks are extremely reluctant to lend to each other, which means they're not going to lend to you and I as consumers, or businesses either. The Fed is injecting tremendous amounts of liquidity into the financial system to get banks lending again, to little avail so far.

"This isn't just a long-term concern: Corporate America relies on overnight lending and short-term commercial paper markets, and an inability to tap those sources of liquidity could result in mass layoffs in the "real" economy, which is something to fear."

"Markets around the world are under stress and that reduces the availability of credit that businesses across America depend on to meet payroll and to purchase inventories," Treasury secretary Hank Paulson argued this afternoon.

I have to admit I've had my fill of the tired "Main Street"/"Wall Street" analogy used by various media pundits, but I do think Art Cashin, UBS director of floor operations, made a fabulous point yesterday when he told Good Morning America that "Main Street is the basis of all of the economy, by which Wall Street trades and prospers. Major failures could occur in a matter of days -- and not just banks and finance, but in brand names known all across the globe."

ABC News reports that in past decades, many industrial companies tapped into the profitable lending industry, but the key players (such as GE and General Motors) have financing divisions that now could be hit by consumers defaulting on loans. Both General Motors and GE have taken a substantial loss from the crisis.

"In towns all across the country, businesses are slowing down -- no new hiring, layoffs are occurring," Cashin told Good Morning America.

Less jobs, of course, mean more mortgages that fail to get paid, more foreclosures, a tougher time securing college loans, more of a struggle to buy necessities (such as groceries), and less of an ability for Americans to save. If you can barely afford to beat back foreclosure or put food on the table without using credit cards, then forget saving for retirement. And in the face of today's shocking decline, having a 401(k) is not the essential padding it once was. I mentioned earlier that $1 trillion was lost in the midst of the turmoil. That money comes out of the 401(k) accounts that most of us have wrapped up in the stock market. Dwindling 401(k) accounts mean we can kiss that retirement (early or otherwise) goodbye for at least the foreseeable future.

Hopefully one positive effect from all this, after the dust has cleared and the market begins to look up once again, is that Americans will "rededicate themselves to saving rather than spending beyond their means," Yahoo Finance says.


Budget Mama said...

I'm actually starting to get a little nervous about all this. I just watched Suze Orman on Oprah the other day. They were talking about getting back to a 'cash economy'. That is where I am right now, I have no choice. It's going to be really tough to stick to a budget, get out of debt and save--during all this.

Anonymous said...

What a lovely synopsis! I have been reading bits and pieces of the new york times as it hits my inbox, but never would have been able to put it all together so eloquently.

I think its hard to take seriously, and understand what the affect will be, and what exactly can be done (nothing really - just living within your means)...

Crystal said...

Budget Mama: I watched Suze Orman on Larry King Live last night and she was discussing the same issue. It's a very scary time!

SavingCent: Thanks! :) There's so much info to parse over all of this that I thought it'd be good to give everyone a brief, simple analysis. I agree that not much can be done by individuals except learning to live with your means.

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