Treatments for an Ill Economy

In the first quarter of 2008, Macro-economics have influenced stock prices more than each corporation’s story. Therefore, the big picture is the topic of Button Financial’s narrative this quarter. How we respond to the volatile economic changes around us is a reflection of how mature and healthy we are, including in our personal relationships with money. These drastic times give us an opportunity to boost our level of money maturity and, ultimately, our overall health. As in all things, to understand and change the big picture, we must first understand and change ourselves.

The economy has taken ill. It began in the U.S. and has spread worldwide. The diagnosis is so complex, a syndrome, more than a single disease, is indicated. Unlike the downturn in 2000-2002 which was more of an “accident” than an “illness,” the action we might take toward recovery is not as clear as shooting a bullet or further investment diversification. Yet, we can take encouragement to know that all the specialists in the world are focused on finding and implementing a cure. The prognosis is not disastrous, despite some nay-sayers. Capitalism is not dying, though its weaknesses as a system have become evident. While its demise is not at hand, it will probably “mutate” over the next 8-10 years.

A bit of history: After World War I, the developed countries were in shambles. Infrastructures and economic systems of Russia and Europe required rebuilding. Each country had to come up with their own answer to the question, “Which should control, free markets or government? The choice of Capitalism requires a Democracy or at least the Rule of Law (ex: property ownership rights). Italy, Spain and Germany elected Fascism. Russia used Marxism and eventually Scientific Socialism. As England believed that pure Capitalism lacked “civility,” they selected a mixed Socialism which allowed private enterprise while insuring to all a “fair share.” Capitalism in the US became Regulated Capitalism after WWII in response to the depression and Keynesian economics (free markets, prone to excesses, need governments to step in).

In this election year, the question is relevant again. Which is the best treatment for our patient, more government regulation providing investor and consumer protection via the Democrats, or the self-correcting nature of free markets via the Republicans? You get to vote!

In the last two days of March, Treasury Secretary Paulson announced a “Blueprint for Regulatory Reform.” He stated, and most agree that many of our regulatory bodies are outmoded, work at cross-purposes and have not provided the investor confidence and consumer protection we expect from government. The implementation of his recommendations, or yet to be created alternative regulatory reforms, will take an estimated 2-8 years. However, Paulson is clear that this is LONG TERM recommended action (its research began in the spring of 2007, long before our patient gave its first sniffle). And, importantly, Paulson emphasized that the government’s current priority is to address the current disruptions in our economy today.

Whose fault is the housing crisis (that which keeps our patient a-bed)? The potential home-owner, the realtor, the mortgage lender, the lack of regulation, the creativity of entrepreneurs, the demands of investors, investment bankers who became a “shadow banking system” and hedge fund managers all play a part. But the most important ingredient to Capitalism, transparency, is missing. Transparency was masked by a complexity that made the ability to understand risks so difficult that the players could not “see” what they were buying. Transactions went through, but the long-term viability of any free market will ultimately fail without transparency. More regulation is needed to insist on transparency so the consumer is protected and the economic system can be self-correcting. We are at a time not unlike the crash of 1929, which resulted in the birth of the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and The Investment Advisors and Investment Company Acts of 1940.

Money Maturity’s view teaches us that our need to assign fault; thoughts of others’ greed, manipulation, and unfairness; anger at regulators, the large corporations or the rich(er); being frozen in the fear of doom or obsessively trying to figure out why, etc., are all the ideas we learned to grab onto in our youth (and by definition are only partial truths). We cling to these thoughts as adults to help us cope with difficult feelings of fear, guilt, anger, sadness, etc. To learn alternative responses to these feelings is the adult work to which each of us must attend if we hope to grow toward (money) maturity.

In the NEAR TERM, the government is asking for more disclosure; disclosure with mortgage originations, and with complex securitization of investment vehicles (SIVs) and other derivatives that populate commercial paper and hedge funds. Even those CFOs with MBAs cannot understand SIVs!

In the meantime, and for the SHORT TERM, a multitude of remedies have been introduced (maybe enough to allow remission), in which we might place our confidence.

• The Federal Reserve Board (The Fed) began and continues to lower interest rates, their primary tool to avoid the worst of economic downturns.
• Rebate checks, the government’s tool of lowering taxes, labeled by President Bush as a “booster shot.”
• To address the immediate liquidity problem, the Fed and Central Banks of the other developed countries injected emergency cash (the life blood of the body economic) into the system.
• To avoid “a run on the bank,” the Fed became a partner in the rescue of the investment banking firm Bear Stearns which would otherwise have folded.
• The Fed will temporarily make direct loans to investment banks in the way they have traditionally lent only to other banks.
• And, the government has applied and continues to create a variety of band-aids against further foreclosures and housing infections.

Does our economy suffer from Recession? Every professional should know not to announce such a diagnosis to the family before all tests are complete! Fear is a nasty impediment to any recovery.

What can you do? Vote. Allow the professionals to their work. Be patient with the process, trust in the universe, accept your losses, and don’t panic. Keep applying the principles of good health (your Investment Policy Statement), pay down your debts, and shore up your emergency fund. Do your personal work toward money maturity. Believe in the resources and resiliency of human nature, including your own. Hug a loved one, smell a rose and be thankful for your life.

If you still feel bad, call me in the morning.

-- Sally Jo