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What will happen with the bailout?

I have gotten this question a lot. Here’s an answer, step by step:

  1. Nobody knows what will happen, including me. So be skeptical about anyone making predictions, including me.
  2. If there really is going to be a collapse of financial institutions in the absence of government intervention, then we will have a long period of economic distress. It would have all the usual hallmarks of tough economic times: stagnant income growth and high unemployment. People would not starve in the streets, however, and it would not be another Great Depression.
  3. But there’s reason for skepticism about collapse. One alleged example of collapse was that McDonald’s was having trouble getting working capital. That proved to be overblown, and beyond that: Do you really think that a business model as sound as McDonald’s couldn’t somehow get funded in its day-to-day operations, even with ready investors holding trillions of dollars of cash and looking for a return? My own opinion is that awkward makeshift institutions would begin to fill in the gaps and McDonald’s would find a way to run. It wouldn’t be as good as our current system but I think we would muddle through.
  4. Politically, both sides have been guilty of brinksmanship in the proposed bailout. The Democrats have been trying to get goodies for political allies in the bailout, while the House Republicans have been trying to put in some long-hoped-for tax changes. This is not the time for any of that.
  5. So, my favored solution: Do a clean, technical bailout that allows the government to buy up distressed mortgage-backed assets and establish an orderly market for their disposal. If there are eventually profits from this, apply them to reducing the national debt.
  6. And when all this is done, get the government out of the business of holding mortgage debt.
  7. And for the future, try to draw a sharp line between assets the government will guarantee (such as bank deposits) and those it won’t (such as hedge fund holdings). Then try to structure things so that anyone who places a bet on non-guaranteed assets is on their own. Too often we have allowed people to take giant risks, reap the giant returns, and then put the losses on the taxpayers if the gamble goes bad.

Don’t hold a bunch of your employer’s stock!

In my book, I recommend not holding onto the stock of your own employer. Instead, the best strategy is “buy and hold index funds.” Those are diversified funds that have a little bit of each of wide variety of companies.

If you hold the stock of your employer, you’re taking a double chance. First, you’re taking the risk that a single stock will decline. But second, you’re taking the risk that when your company’s fortunes decline, you lose big in the stock market and lose from job-related effects.

Some employers will match your purchases of their stock. Fine. Find out the time limits and, as soon as you’re permitted, diversify out of your own employer’s stock.

There are many tales of woe from people at Enron, Merrill Lynch, Lehman Brothers and AIG that all made the same mistake — holding their own employer’s stock in large amounts. Don’t make the same mistake.

Sensible advice about bank runs

The best advice about standing in line to get your money out of a shaky bank is:

Don’t.

There’s very little to be gained by spending a day standing in line. Remember, we have federal deposit insurance that will guarantee your deposit up to $100,000. So, just keep that deposit where it is, in the shaky bank, and continue to write checks on it as usual.

But what if you just absolutely have to get that money out? Consider the fact that if you take the money out in cash, it will then be vulnerable to loss and theft — both far bigger dangers than bank collapse.

Continue reading Sensible advice about bank runs

The “Rodney Dangerfield” economy

Comedian Rodney Dangerfield used to lament, “I get no respect.” The U.S. economy, which now appears finally headed for a recession after years of growth, also gets little respect. This article from Social Education provides some reasons why. Of primary interest to this site’s visitors: The article explains how the “hedonic treadmill” can keep people from feeling good even as their material standard of living increases:

The image [of the hedonic treadmill] is that of someone who must run faster just to stay in the same place. The reasoning is that people seem to judge their well-being not by their own standard of living, but by how it compares with some reference level. The reference level could be set by neighbors’ standard of living or an economy-wide average. In either case, evenly distributed growth would leave everyone in the same place relative to the reference group, having a higher standard of living but no greater happiness.

The news isn’t all bad. We have the ability to get off the hedonic treadmill by setting our own standards for what we’ll consider prosperous. What better time than now to get off the hedonic treadmill?