Over the last 12 months we, as young investors, have had to endure unprecedented market swings and considerable volatility. Recent unemployment data and the $700 billion bill that was signed into law on Friday 10/3/08 suggest this trend may continue for some time to come.
The bill was designed to ease investor tensions, restore confidence to the credit markets, and stabilize the stock market. Did the bill achieve these goals? There are two sides to this debate. It was touted by some as a relief package that would finally restore peace of mind to the average American family and save “Main Street”. But it’s also been viewed as nothing more than a bailout for the wealthy Wall Street elite that does not fix the real problems facing the credit market.
How Did This Happen?
Before we draw conclusions about the bill, we first need to understand how we got into this problem in the first place. Essentially, over the past few years large banks and institutional lenders adopted the philosophy that they were "too big to fail.” They took advantage of lax regulation and monitoring by government agencies and made loans they shouldn’t have made. This was done with the intention of boosting their bottom line and increasing profit margins, no matter what the long-term effects were. As house prices soared during the mid 2000’s, so did mortgages.
Families across the country were buying more house than they could afford and found themselves with mortgages that stretched them beyond their means. The result was a rise in late payments and then eventually foreclosures. Fear quickly spread that more foreclosures were imminent and this negatively affected certain investments that rely on the income received through mortgages. A vicious cycle began. Credit became tighter and it became harder for average families to get a bank loan. The tightening of credit led to increased fear, which led to even more tightening, and the cycle perpetuated until finally banks began to fail one after the other.
The government, fearing that investor panic was imminent, decided to step in and pass a $700 billion relief/bailout bill. The money earmarked for the bill is designed to go directly to bail out the large banks that are facing the risk of going out of business. As average consumers, we may never know exactly how the $700 billion gets disbursed or to which banks it goes, but it’s supposed to ultimately provide money to average families on “Main Street” by trickling down through the banking system.
As for whether the bill was a good idea, the stock market is the real judge and jury. After the bill was passed the stock market immediately fell almost 1,000 points over a 2 day period. But, the long-term effects are still unknown.
Is Your Money Safe?
Now for the real question, “Is your money safe?” Remember, fear sells but optimism wins. What this means is, yes, your money is safe if it’s in a bank that is FDIC insured, but it’s easy to be fooled by some of the popular media we see. If you have less than $250,000 at a bank, then it is insured by the FDIC which means even if the bank fails, your money still belongs to you and is not at risk. But, don’t just take my word for it. Remember that in times of fear, knowledge is empowering. If you’re not sure whether your money is safe, go to your bank, make an appointment with a private banker, and ask him or her to explain the safety of your money. Make sure none of your questions remain unanswered and you will feel more in control during this time of unease.
Matthew Brandeburg, CFP® has five years of fee-only financial planning experience and runs his own financial advisory practice. He can be reached for comment at 614.477.7350.