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An Idiot’s Guide to Financial Crises

A total financial moron explains it all for you.

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Illustration by Kagan McLeod  

I don’t know anything about money. I don’t mean that I’m not a financial expert. I mean that, when it comes to money, I’m functionally illiterate. I don’t like to think about finances, and on the rare occasions that I do, my thought process goes like this: I have a job. I earn money. I spend most of it. The rest I put in a savings account. That’s it. People who know about money are always yelling at me, because they can’t believe I’m still throwing away money by renting (mortgages are confusing) or not diversifying my portfolio (what portfolio?). And I freely acknowledge that people who think a lot about money will invariably accumulate more of it than I will. And I’m okay with that, since the trade-off is, I don’t have to spend my time thinking about money.

But even I understand that, when people who think a lot about money get worried, I should get worried, too. Which is how I found myself anxiously scanning through articles that consisted of 90 percent gobbledygook (credit-default swaps?) and 10 percent startling quotes such as, “The situation is very bad, the situation is getting worse, and the risks are that it could get very bad” (National Bureau of Economic Research president Martin Feldstein) and “The current financial crisis in the U.S. is likely to be judged in retrospect as the most wrenching since the end of the Second World War” (Alan Greenspan—that guy’s smart, right?). Because for me, finding out that an 85-year-old investment bank nearly failed is like waking up to the headline fire department burns to the ground. And then turning on the TV to find the fire chief saying, “Yeah, this is a pretty bad fire. It could well be out of control. And no one really knows how many more houses will burn down.” Really, Fire Chief? Aren’t you supposed to be keeping tabs on that kind of thing? And is this the point at which I should start getting worried that my tiny little house is going to burn down, too?

So I did what I normally do when I don’t know anything about something, which is to call up some people who do. Of course, when it comes to the economy, there are many, many people who claim to know a lot about it, yet they don’t agree with each other at all. Except for right now. Because while people disagree on who started the fire, or how long it will burn, everyone seems to be on the same page about one thing: The house is definitely on fire.

“Here’s the simple version,” says Tyler Cowen, professor of economics at George Mason University and author of Discover Your Inner Economist. “The real-estate bubble collapsed. There needs to be a big sectoral shift into other things. The Fed can’t help that much. So we’re in a recession. And all the meanings of that—lower retail sales, higher unemployment, and so on—odds are we’ll get those. That’s the bad news for the person on the street.” And, if your street happens to be in New York, the news is even worse for you. That’s because all those people in the financial sector who are now losing their jobs live here, and spend a lot of money here, and pay taxes here. This means less money in the system, which means everyone feels the pain.

Thus far, much of the talk about this “crisis” has centered on failed mortgages and falling housing prices, which I don’t care about, since I don’t own a house, especially not one built ten minutes ago in Arizona. But this crisis isn’t about houses anymore. “Say you bought a house two years ago for $450,000,” says Barry Ritholtz, CEO and director of Equity Research at Fusion IQ. “And it’s worth $425,000 this year, and $430,000 next year—ultimately, who cares? It’s not going to zero. Your house isn’t the problem. The way this will really impact people is the prices you pay for goods. And we’re starting to see it affect employment as well. You know, the traditional economic worries: Stuff costs more money and you may get fired.”

So let me get this straight. I might lose my job. And right when I lose my job, I’m going to find that my savings are worth less, and that prices for things are going up. Like gas. And milk. “The reason this has become such a mess,” says Ritholtz, “is because the housing market imploded, and now the credit crunch is affecting the ability of businesses and individuals to borrow money, which has caused the Fed to do what they do best: lower interest rates, print money, and try to inject cash into the system. But there’s a cost to that. The cost is inflation.”


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