Thursday, February 28, 2008

A State of the Union

In “Don’t Follow the Herd on the Economy”, Glenn Beck outlines five phases of the possible recession/depression we’re hearing so much about (based on a conversation with former treasury department advisor Nouriel Roubini (currently chairman of RGE Monitor and professor of economics at New York University's Stern School of Business). In brief (I recommend reading the entire article):

• DEFCONOMY FIVE
The housing downturn turns into a free fall, making it the worst collapse in our country's history. That not only triggers massive numbers of foreclosures and lost household wealth, but it also sets off another large wave of bank write-downs.
Odds of it happening: "extremely likely, even unavoidable" because of "the excess supply of new homes in the market is like we've never seen before." Prices need to fall another 10-20%.
• DEFCONOMY FOUR
Americans upside-down on their mortgages and unable to pay their home equity loans begin defaulting on other debt, like credit cards, car loans and student loans.
Odds of it happening: High. Roubini says that 8 million households are already upside-down on their mortgages and he thinks we could see that number go to between 16 million and 24 million by the end of 2009.
• DEFCONOMY THREE
A national or large regional bank finally collapses, triggering hedge fund failures and general chaos on Wall Street, potentially leading to a 1987-style market crash.
Odds of it happening: Very good. Roubini says that we'll likely socialize the losses, "effectively nationalizing the mortgages or the banks." He thinks the stock market will head south throughout the year as fears about a severe recession are confirmed.
• DEFCONOMY TWO
Most forms of credit (both to consumers and businesses) become virtually nonexistent.
Odds of it happening: Good. Silver lining: Without extra credit available, people might have to actually (gasp!) live within their means.
• DEFCONOMY ONE
A full economic meltdown results in a complete failure of the underlying financial system. What will be known to future generations as "The Greater Depression" has arrived.
Odds of it happening: Not likely. Roubini believes that this will be a "very painful and severe recession" that could last for 18 months or more, but it will be more like 1981 than 1929.

My thoughts:

Home ownership: I’m suddenly wishing I’d gone into a super-cheap share apartment so that I could be stockpiling half of what I’m now paying in rent. Despite the astronomic housing costs in New York, it looks like a few years from now is going to be a GREAT time to buy a home (house, apartment, condo, whatever), and I wish I could really save up for it. If nothing else, I think I’m going to start earmarking a portion of my savings for an eventual down payment, in hopes that by the time housing prices hit rock bottom I’ll have enough saved up to at least be considered for a mortgage.

Bankruptcy: I’m more glad than ever that I have no consumer debt. I pay my credit card off in full every month (it’s fairly common for me to have a month wherein nothing gets charged but automatic payments for things like my cell phone anyway). I just took out Federal Stafford loans for which I will be reimbursed by my job at the end of the semester—and I will be stashing that reimbursement in a savings account with the highest interest rate I can find, aiming to pay them off in full when I graduate (thus paying no interest). I’m going to continue not racking up any debt and living within my means.

Should I be worried about my bank failing? I don’t think so—all my accounts are at FDIC-insured banks (aside from my retirement savings in a 401k and Traditional IRA, neither of which are protected by the FDIC). I bank at a giant worldwide bank and also at a smaller one, as well as ING online. I might start paying attention if any of them suddenly starts making the news.

What about my investments? I will not stop contributing to my 401k (the IRA is a rollover from an old job, and I don’t actively contribute to it). It hurts to know that I’m losing money, but I’m buying more investments and when things turn around I will gain more in value than I’d “save” by not investing now. I have another 30-40 years before retirement, and this is all about weathering the storm. I have considered converting my Traditional Roth into a Roth IRA—I’m not making a whole lot of money now, so I might be in a higher tax bracket when I retire and begin withdrawing. However, I probably will NOT be living where I am now, where I pay city and state income tax on top of Federal—and if I’ve done the math right, I’ll have to be making so much money to even that out that I won’t care about the taxes.

In short—yes, things are not looking so great in the economy. I feel really bad for people who bought too much house or got themselves into debt over their heads. I’m glad that my family gave me enough of a financial understanding when I was growing up to prevent me from doing the same—and I’m still actively taking steps to maintain my financial security. I’m also glad that I’m interested in personal finance so that when something happens, I will have been sort of expecting it.

4 comments:

  1. looks like uve got a solid plan, keep it up!

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  2. Not sure if nyc real estate will ever hit rock bottom. There's just way more demand than supply.

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  3. q, I don't expect that housing prices in New York will actually reach rock bottom--but if foreclosures become as common here as they are in the rest of the country, prices will have to stabilize or start going down. If nothing else, it gives me hope that I might be able to buy a condo where a year ago I figured that was pretty much hopeless on a publishing salary.

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Thanks for commenting!