Thursday, October 16, 2008

We ARE the Economy: And We Need Some Global Chilling

We have the ability right now to slow down the economic crisis by taking a collective deep breath and not reacting. I know this will go against the grain of the way most people think, but I believe the only way through this is if we don’t hunker down protecting only ourselves and our families and think globally.

That means leaving your money in your savings/checking accounts at your local bank or credit union, not stockpiling your cash in a safe or under your mattress, and leaving your 401K and stocks alone.

Without cash, these institutions can collapse. But now they're getting infused with cash thanks to the nebulous $700 billion bailout, and lending money to each other. As much as I'm tempted to max out my credit cards and ask where my bailout is, I've never relied on someone else to bail me out for my poor decisions. So credit cards stay on ice for now.

Losses on paper (stocks and 401Ks) are only on paper until you act. If you don’t sell at a low price, you don’t take the loss.

The economy is cyclical and complicated and I am in no way an expert. But what I can say with confidence is that most news programs are riding the sensationalism wave, highlighting the negative, almost hoping for a collapse. In fact, the headlines could just as easily be stating: “Stock prices are at a massive discount! Best prices in years! Buy low, baby!” I’m not recommending you buy up stock, or boost your 401K contributions. I’m just saying that from what I’ve read and heard, long-term investments (stocks and 401Ks) work over the long term. So don't panic.

Think about this: if your house dropped 25% in value today based on comps in your neighborhood or a state reassessment, would you sell it from fear of it losing even more equity? Or would you think, “My mortgage (if it’s hopefully fixed) isn’t changing and I’m not planning on moving in the next six months (or next six years), so I think I’ll just wait it out.”

I wouldn’t panic sell my house. Although honestly, I think panic buying and ridiculously inflated prices in the last housing boom is what really got us here. Stocks and 401Ks are definitely a lot easier to dump, but it doesn’t mean you have to. It’s just on paper.

The foreclosure rates are also being exaggerated. From what I’ve read they run at about 3% in this country, which is higher than usual so the headlines say things like: Foreclosures up 67%! That doesn’t mean 67% of the homes are now in foreclosure; it means the number of homes in foreclosure jumped 67% from the last time they checked. Another way to look at this: Over 96% of the homes are not in foreclosure.

And these mortgages are tied to homes that have value – they’re not junk mortgages with zero collateral. The homes are overpriced, and a lot of people took out loans gambling that the equity would continue to grow at an exaggerated rate, or they’d be making more money – neither factors that are guaranteed. And those mortgages are bundled with stable loans - apparently they're just not easy to manage.

The common element to all of this is people and their love for money.

People buy and sell real estate. People appraise homes. People list homes. People sell homes. And people buy homes. Corporations are run by people. Governments are run by people. Decisions are made by people.

Mortgage brokers, investment bankers, stock brokers, real estate agents, and home appraisers are people. The actions of people got us here, not faceless entities.

Even CEOs and executives are people; overpaid people, but people nonetheless.

It also means we can’t prevent the people of ExxonMobil or Bank of America from charging its fellow citizens whatever the heck they want to. It’s part of the free market society that allows you to sell a Phillies cap with two tickets to the World Series on eBay for $1,250. A piece.

The only way out of a mess like this is to educate ourselves through reliable sources of information, dismiss our old ways of thinking and not let it happen again. And to just chillax for a minute.

It’s time for the era of greed and personal entitlement to give way to an age of altruism. Instead of blame-storming, let's reprioritize our needs, reassess what’s truly important, and start talking about how we can help each other.

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