Wednesday, October 29, 2008

Lessons from a Financial Crisis

It is a little over a month since financial mayhem hit both Main Street and Wall Street. Many, if not most, are still not exactly sure "what happened." In fact, it still may be a little too early to attempt to assess the "lessons" from this crisis. However, I am going to take a shot at it.

  • You can't lose money in stock, unless you sell your stock. This is exactly why Jim Cramer of CNBC was very dangerous when he announced to millions of Americans to "sell, sell, sell" on the Today Show. The argument he made actually has added to the erosion of the market.

  • There are reasons why community banking has thrived, while major banks have largely suffered. National banks (such as WaMu and Wachovia) have found themselves as massive leviathans, with the left hand often not knowing what the right hand is doing. These national banks are typically publicly owned, which means they have enormous pressure to show higher profits. This made them tempted to jump into the sub-prime loan environment that has brought the economy down. Local banks could afford to be more steadfast in their growth and, as a result, have enjoyed a fifteen percent increase in their annual profits, on average. Because of national banks being "damaged goods", community banks will prosper even more.

  • Money doesn't disappear during a recession, it just some times requires more creativity in making sure it comes to you. You might have to make changes in the way you do business, but in most cases your company can still be successful.

  • We should pressure the government to lower taxes. Interest rates are certainly low enough, the big concern is taxation. Because the Congress didn't approve the continuation of the tax cuts that Bush pushed into law, Americans are looking at a tax increase in 2009. In fact, the Capital Gains tax alone is currently 0 percent for most Americans, but will rise to 20 percent in 2009. Are you still wondering why the market is gravitating so strongly towards selling?

  • The bailout package has done more harm than good. Things are fairly ominous when a senior Treasury official declares they asked for the enormous number of over $700 billion because they weren't sure what was needed. This plan, which prevented the market from finally capitulating and finding its true bottom, has raised fears of hyperinflation, have made people more alarmed because of the confusion that surrounds the situation ("it must be bad if it required such a huge amount of money"), and has created an unnatural buffer between the market and economic reality. Worse still, the banks that signed on to this rescue are going to be subject to a whole net set of rules because the government is in the process of converting the major banks into a utility.

  • The best advice when it comes to dealing with our current financial situation?

    • Think more and feel less. Much of the damage on Wall Street is being driven by irrational fear.

    • Focus on what you can do and not those things out of your control.

    • Seriously consider diversifying (at least future investments if it is too costly to sell at this time). Remember, there are always opportunities for money to be made.
    Kevin Price articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media.

    Kevin Price is Host of the
    Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.


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