Fallout: The Financial Crisis

The financial year in review

Tess Vigeland Dec 25, 2009
"2009," set in coins. iStockPhoto
Fallout: The Financial Crisis

The financial year in review

Tess Vigeland Dec 25, 2009
"2009," set in coins. iStockPhoto


Tess Vigeland: Don’t know about you, but we here at Marketplace Money spent most of 2009 reeling and trying to recover from the events of 2008. At some point this year, the economic collapse got a new name: The Great Recession. And along the way, personal finance got some time in the spotlight. Shall we review? Why, yes!

With some good friends of the show. First, welcome to personal finance columnist and author Liz Pulliam Weston.

Liz Pulliam Weston: Thank you, Tess.

Vigeland: Wall Street Journal columnist Jason Zweig. Hi Jason.

Jason Zweig: Hi Tess.

Vigeland: And Knight Kiplinger, the editor-in-chief, Kiplinger’s Personal Finance magazine. Hi Knight.

Knight Kiplinger: Well, good to be with you Tess.

Vigeland: Let me start by asking each of you what you think the biggest personal finance story is of this year. We have a lot to choose from — housing, credit cards, Dow 6,500, 10 percent unemployment. What was the most important thing that happened? Let me start with you Liz.

Weston: Well, I had such a focus on credit that that’s where my brain instantly goes. And I think one of the huge stories of this year was the credit card issuers and how they started, not just beating up on the subprime people, but taking the schoolyard bully tactics all the way to the popular kids and starting to raise rates and lower limits even on people with good credit.

We kinda knew that was going to happen, but the extent to which it happened, I think, shocked a lot of people.

Vigeland: I think it did shock a lot of people. You know, the amount of mail that we’re getting from people who say, “Look, I pay off my bill every month, on time. I have a great credit score. Yet they are either jacking my interest rate up to 30 percent or wiping out my credit line.”

Weston: Yeah, we’ve been talking about how this could happen for years, that credit card companies can change the terms on a whim. They just chose not to with the people with better credit. And now they’re doing it to everybody. So people are seeing very graphically that yes, they can take this agreement that I thought I had with them and upend it.

Vigeland: What do you think Knight, biggest story of the year?

Kiplinger: I think it was housing. I think it was the further slide in home prices and the house had become the piggy bank. Home equity was the driver of overconsumption, overspending, overborrowing in this decade. And now housing has returned to its rightful place, as a place you live. It is shelter; it is not an investment.

Vigeland: If this is a good thing, however, what it did do was mean that people didn’t have a store of cash that they thought they had, right?

Kiplinger: Right. A lot of people were saving for their retirement in their home, and I feel very badly for those people that when their equity eroded, they’re left without a broad array of financial assets, which should be the basis of future retirement security.

Vigeland: Jason, let me turn to you. We’ve talked now about housing and credit cards, what do you think was the biggest story of ’09?

Zweig: Well, I wonder Tess whether the biggest story of ’09 is the one that didn’t happen. You know, we went through the biggest boom and bust, arguably, since the Great Depression. And almost the entire American public was howling for the heads of investment banks and brokerage firms to be chopped off and marched on poles down Wall Street — and we did not have that kind of government response. So I’m not a Marxist by any means, I’m a die hard capitalist, but I am a little worried that the sense of justice that was meted out may not really have satisfied the underlying current of anger in society, and we may have another round of this before we’re through.

Vigeland: Liz, let me follow up on that and ask you about where we have come since the outrage. It seems like a lot of the people who did things right, got punished, along with the folks who perhaps weren’t as wise as they should’ve been. What kind of lesson do you take out of that, if you have been a responsible consumer?

Weston: Well, I think people have been scapegoating to some extent, and I think actually, that made things a little bit worse. Because this housing crisis has been coming for a while, and there were a lot of people saying, “I don’t want my neighbor to get a bail out. That’s not fair.” Well the problem is, we’re all interconnected and when your neighbor loses his house, your value goes down, the crime in your neighborhood could go up and as we saw, the entire economy is tied to our housing prices and what happens to them. So my feeling is, if we’ve been a little bit more generous with our neighbors, perhaps the economy might not have gotten so bad, and this housing crisis might not have gotten so bad.

Kiplinger: Part of the problem with scapegoating is the crisis was born of many, many factors, including bad habits of all of us collectively, the American people. Yes, there was mortgage fraud, there was very bad rating of highly risky securities. But abetting this was a broad spectrum of the American people who were not saving at all, the savings rate went to zero at one point — actually dipped negative for a while. So the responsibility is very, very broadly shared, and I think that has tempered the sense of revenge and scapegoating that we might otherwise have seen.

Vigeland: But I wonder, then, where people are supposed to place their anger, particularly when they see that the bailout has not gone to their neighbors. As Liz was suggesting perhaps it should’ve. You know, the various mortgage rescue programs that have been proposed have not worked as well as perhaps people have hoped. It does seem that not a lot of the rescue effort has made its way to the average consumer.

Zweig: Tess, if I could just jump in for a second — my dad, who was a very wise man, used to have a saying that when you point your finger at somebody else, at least three of your fingers are pointing back at you. And I think Knight makes a really perceptive point, which is that, we really were all in this together. And of course, it’s the overcompensated executives on Wall Street — who took their firms down in flames and pocketed hundreds of millions of dollars in the process for themselves — who make everybody annoyed, because they’re very visible.

But there are 300 million people in this country, and we’ve really developed in the past couple of decades a bit of a culture of what we might call “responsibility-free decision making.” And you know, we did get to the point where you can pick up your pack of cigarettes that says right on the side of it, the surgeon general says what you’re about to do will kill you. And you can smoke them all day long and then when you get sick, you sue the tobacco company.

There comes a point at which people need to recognize that when someone offers you a loan that you can’t afford, it’s not 100 percent the other person’s fault. Even if you didn’t understand the documentation and even if you were mislead, something should’ve told you, “I can’t afford this.”

Weston: That’s probably the most remarkable part of this crisis, is how widespread the guilt was. It wasn’t just the government, it wasn’t just corporations, it wasn’t just borrowers — it was all of us together. And one of the things that I see coming out of this, that might be the silver lining, is that people are realizing some of the personal finance basics that Knight has been preaching for years, that Jason and I have been talking about: You’ve gotta have an emergency fund, you’ve gotta be saving for retirement, but looking at the risk you are taking. I think one of the most tragic things was how many people so close to retirement were overdosed on stocks.

Knight: Well put.

Weston: Yeah. And they got the message just too late and their retirements have been totaled or decimated or at least put off because of these decisions. But now people are realizing what we were talking about and why it was so important.

Vigeland: One of the elements of the Great Recession that I think everybody would agree we all took a lesson from is risk. You look back one year ago as the market continued to tumble, we hit a lot in March of this year and a lot of people panic sold. What do you think that tells us about old rules versus any new rules that we need to learn or keep?

Knight: Tess, I think one of the unappreciated lessons of the Great Recession is that it still makes sense to continue buying on a monthly or quarterly basis, very systematically, even as markets drop. At Kiplinger, we were a champion of dollar cost averaging back in the 1940s, when there was a deep fear of stock investing. I think we served them well with that advice, and I think it’s still good advice.

Weston: I think the most important four words to listen for are “It’s different this time.” And there’s different versions of that argument, and it keeps happening over and over. Anytime you hear that, you’ve gotta step back and be suspicious.

Vigeland: Let me finish up by asking all of you a final question, which is what lessons do you think we have not learned? Liz, let me start with you.

Weston: Oh that’s a tough one. I still don’t think we have enough of the anti-bubble mentality. I still think we see people out there chasing returns and not fully integrating the idea of risk.

Vigeland: Jason, what have we not learned?

Zweig: Well, I think one of the things we haven’t learned, Tess, is that we don’t learn lessons.

Vigeland: Oh, that’s just sad.

Zweig: They learn over-specific lessons. So, if you chased the hot returns of Internet stocks in 1999, and then you lost all your money in 2000, the lesson you learned was not to chase the performance of Internet stocks. So then you went out and you flipped condos in Ft. Lauderdale and then you got wiped out on that. And now the lesson you’ve learned is don’t flip real estate, but you’re piling into gold. And if that’s the way you learn lessons, then you haven’t learned any lesson at all.

Vigeland: Knight, what do you think — what have we not learned and might we learn it in 2010?

Kiplinger: Playing up on Liz and Jason’s responses, I think what we haven’t learned is that a sensible plan that you put on autopilot, with an asset allocation that is appropriate to your, your tolerance for risk, your desire to sleep soundly at night, will outperform a frantic chasing of the latest hot asset class, any day, any year.

Vigeland: All right, I’m going to put you each on the spot and give you 30 seconds to give your one prediction that we will check in with you a year from now and see whether it came true. Liz?

Weston: Credit card companies will find new ways to annoy their users.

Vigeland: Oh that’s easy!

Weston: I know, sorry. That’s the first thing I could think of.

Vigeland: Knight?

Kiplinger: I think that this year, quality blue chip stocks will outperform alternative assets.

Vigeland: All right. Jason?

Zweig: People will look back at what happened and think they saw it coming all along. When in fact, they had no idea what was going to happen next. My colleagues on the panel do, but I’m talking about the people on Wall Street and their clients around the country. It’s almost as if for a lot of American investors, this market crash never occurred. The party seems to be starting up again, and a lot of people seem to have forgotten the pain that we’ve been through, and I’m a little worried about that.

Vigeland: Welcome to 2004. Jason Zweig, Knight Kiplinger and Liz Pulliam Weston, thank you all, and I wish you all a very happy new year.

Weston: Happy holidays Tess.

Kiplinger: Bye bye Tess.

Zweig: Bye, thank you Tess.

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