flwyd | The Financial Crisis: What Does It Mean To Me? (Reply)

For those of us with relatively insignificant (in comparison... obviously not insignificant to ME) bank holdings, no credit debt to speak of, no large loans outstanding and no stocks/bonds/other things of that nature, what will the practical personal fallout of the bailout be, if any?

The correct answer to that question requires predicting the future. Economists spend a lot of time predicting the future. But there's a lot of variation between economists' predictions, so you can often pick the prediction you like best and pretend that's what the future holds. "What will happen?" is not nearly as clear as "What could happen?"

First, what won't happen is losing the money in your bank account. The FDIC and NCUA just raised their insurance amount from $100,000 to $250,000. That means that even if your bank or credit union collapses because their loans all fail, you'll keep all your money (checking accounts, saving accounts, money market accounts, etc.) up to a quarter million dollars. So you don't have any reason to withdraw all your cash and stuff it under your mattress.

The key part of the current financial crisis is a halt in lending. Investors have been very reluctant to lend money to businesses and other banks. A lot of companies run on debt—retail stores often don't turn a profit until Christmas season so they borrow money during the rest of the year—and if they can't get loans they may have to fold. I haven't heard of a sudden rash of collapsing companies outside the financial sector. The government has taken a fairly active role in trying to stabilize things and if a lot of companies were suddenly about to collapse for lack of credit, the Federal Reserve would probably step in (which it did a week or so ago when it announced it would buy commercial paper). This is therefore probably a low risk right now, but it wouldn't hurt to check in with anybody you're receiving a regular paycheck from and ask what the company's financial situation is.

I think a bigger risk to companies is a weak Christmas sales season. I heard one time that "If Christmas were canceled one year, the whole American economy would collapse." A lot of people have reduced spending recently due to all the media attention on economic collapse. (Would you buy an iPod after the Secretary of the Treasury says "If we don't pass this bill, we might not have an economy by Monday?") If a lot of retailers collapse due to week holiday spending, you'd probably have some friends that were out of work, you might not be able to buy some of the stuff you want, and so forth. It would be a big sign of wide-spread economic hard times, a recession/depression hitting most Americans. I don't suspect this Christmas Crash scenario will happen, though. September of 2001 also featured a sudden change in market atmosphere and public worry about the future, but January 2002 didn't feature a major collapse of the retail sector (though it was a rough season).

If you're considering taking out a loan soon (to buy a car or a house or start a business or something) you may find it hard to get credit at a reasonable interest rate since lenders are reassessing who they ought to give money to. Depending what options in the bailout plan get activated and what new mortgage-relevant laws get passed, the housing market could go in several directions. If the government takes steps (changing mortgage terms or extra cash or whatever) to help current owners keep homes then I wouldn't expect a big change from the current housing situation, though home prices may continue to fall. If a lot of mortgage holders can't keep their properties, things may get exciting. If you rent a house, or condo (etc.) and the owner can't pay the mortgage, it'll go into foreclosure. If it's bought and the new owner wants to move in, you'll need to find a place to go. On the plus side, if you can afford it there may be some reasonably-priced foreclosures you could buy in such a situation.

Tied to the general economic situation (and not particularly to the bank bailout), commodities prices have fallen recently. Oil was trading around $90 a barrel this week, down from over $140 this summer. You've probably noticed gas prices are down; some of this is seasonal, but some is due to commodities traders selling in the face of uncertain financial future. (I keep typing "commodoties." When their prices go down, it's a nice whirlpool effect.) Food may also get cheaper.

Another thing that could happen: Your parents might get worried about their retirement savings and call you for advice. I spent around an hour explaining recent financial news to my mom last week. I advised her not to withdraw a bunch of money because she wouldn't have a chance to earn back what she's lost in the market. Calls from parents will give you the opportunity to reflect on things that ups and downs of financial markets can't take away: having conversations with people you like. Also: going for walks/hikes/bike rides, lying around in the sun, and socializing over board, card, and role playing games. Anybody want to play Monopoly?

Longer term effects: As the presidential debate moderators have mentioned, the next president will probably need to scale back some of his proposed projects in light of the state of the economy and the fact that $700 billion may be tied up in chunks of mortgages. So if you're hoping for particular proposals to come into effect next year, you might need to brace for disappointment. But really, that's sound advice for any political campaign. On the flip side, if there's a government program you're not fond of, 2009 might be a good time to organize a campaign to defund it. Like, say... "Hey, we've just spent $700 billion on a bank bailout. How about we don't spend another $700 billion on Iraq?"

As things ripple throughout the world, foreign economies may be rather volatile. It might be a great time to go to Europe if the Dollar regains significant ground against the Euro. It sounds like Iceland could use some cash... It's possible that countries who weren't closely tied into the scene become (relatively) better off -- maybe South America will be the place to be instead of China. But unless you're planning on international travel or business, changes in foreign markets won't have a direct effect on you and indirect effects are largely speculation at this point.

Further listening: This American Life: Another Frightening Show About The Economy. NPR: Planet Money podcast and blog. Adam Davidson from NPR (who's also the main guy in the This American Life economy shows) is the best business/economy reporter I've heard. I also like Steve Evans, the sometimes host of Business Daily on the BBC. He has a very engaging interview style