Ask Money

Its not fair, right?

Chris Farrell Jan 12, 2009

Question: Fortunately, our personal and self-employed business credit rating is very good, no late payments, etc. It would almost seem that with all the proposed “bailouts”, people are being rewarded for mis-managing their finances and credit. What about us? What do we get for being financially responsible? What’s in it for me? Bob, Deltona, FL

Answer: Congratulations on managing your money well. You’re far from alone in feeling that the bailout isn’t fair, that it isn’t right that folks who didn’t get caught up in the real estate frenzy and borrowing boom of the 2000s are now paying for the financial mistakes of those that did. Like you, they were prudent with their money. Now they’re on the hook for bailing out Wall Street, bankers, and irresponsible borrowers. That’s not fair, is it?

No, it isn’t.

That said, none of this means the current bailout is a mistake. Would it be fair to put the economy into a deep recession or depression? I don’t think so.

Here’s the rub. If the monetary and fiscal authorities are right in their judgment that the risk of an economic plunge of frightening proportions is real–and I think they are–then the Herculean actions they’re taking are fair to all of us. And it’s striking how a majority of economists looking at what is going on in the financial markets, watching the ongoing national plunge in housing prices and accelerating unemployment take the risk of a depression seriously.

For instance, at the recent American Economics Association annual meeting there was a general agreement that the economy needed massive fiscal stimulus. As Michael Mandel, chief economist at Business Week reported from the convention, the highly respected Harvard University economist Kenneth Rogoff set the tome for the three day meeting: “His message was a gloomy one. We’ve got a lot further down to go,” says Mandel. “He compared the U.S. crisis to other big financial cataclysms, among them the Nordic banking crises of the early 1990s and the Asian crisis of 1997-98, and suggested we are following much the same path. In each of these, the devastation was enormous, with home prices, adjusted for inflation, dropping by an average of 35% over the stretch of the downturn, and the unemployment rate rising by an average of 7 percentage points over the period.”

The good news for you is that there is potentially a huge reward for your personal fiscal prudence. History shows that for anyone with money, downturns offer lots of opportunities to find terrific bargains. You get to buy good assets at a cheap price. Want to purchase a home at a substantial discount? You can. Good companies are selling at a discount in the market, too. I’d keep my eye open for bargains. After all, those that are strapped can’t tale advantage of them.

That’s fair, no?

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