Wednesday, September 17

The obligatory "stock market" post



Unless you're living in a soundproofed house without connection to any media, you should have heard about the stock market panic.


Long story short, inasfar as I understand it:

  1. Lehman Bros called Chapter 11. The Fed wouldn’t bail them out, so they filed for bankruptcy.
  2. Merrill Lynch opted for euthanasia. Lehman left a lot of uncertainty. Merrill Lynch wasn’t ready to gamble. Bank of America bought it up.
  3. AIG is saved. Despite putting its foot down with Lehman, the Fed announced it will guarantee up to $85 billion for AIG.
  4. WaMu sinking? There are rumors that the government is going to help out this bank, which has been foundering for some time.



According to experts, this is only the beginning. Or the middle, if you see this as an extension of the subprime crisis.


Point is, there's much wailing and gnashing of teeth. People are panicked, anxious, angry, pessimistic -- all sorts of unpleasant adjectives. An MSN Top Stock's blogger even went so far as to refer to the "stock market collapse" which I think is still a tad premature.


That said, this isn’t my area. I didn’t want to do a post about it. But as crisis piled on crisis, I started seeing an underlying theme near and dear to my heart:


We've stopped seeing money as real.



Of course, there are plenty of other factors: too much risk, too many rewards for those risks, greed, myopia, arrogance, etc. But, really, at the base of a lot of these problems lies a common thread: People deal with money as an abstraction.





The art of the abstract


We're all guilty of this, to some degree. More technology meant more convenience – but it also meant that money stopped automatically being equated with cash. Instead, it's theoretical money, bits of information, numbers on a page.



The main thing is money isn’t really money anymore.



Most Americans get a slip of paper each payday. It tells them how much they made, how much they kept and whether it's already in their bank account.


We might withdraw some cash for day-to-day needs, but most of the money remains in our accounts.



And what about those accounts? How real are they?


  • Can you point to your account?
  • Is it in a physical location?
  • Is there a cash-filled cubbyhole with your name on it ?
  • When you pay bills, do the bankers bundle up some $20s and run to the post office?



Of course not. The idea is laughable. But if it’s not really anywhere, how do we know that it’s really there?



You could argue that those numbers in your bank buy goods and services. But with checks, debit, credit and EFTs, we still aren’t dealing with actual money. It’s still a game, shifting numbers from one spot to another.






Don’t fence it in


The fact is, this society really can’t handle the limitations of physical money. As it stands now, our money exists everywhere.



  • It could be at any one of several bank branches.
  • It could be in an ATM (and not even, necessarily, your bank’s ATM).
  • It’s always in your debit card, just a PIN number away.
  • It could even be online, so that we can pay bills without stamps.



Cash, on the other hand, is only ever in one place. And if that place isn’t in your pocket or wallet, you’re pretty much out of luck.



So, you can know that your money is real – and risk limitations. Or you can take the bank’s word that it’s available. And, of course, the government’s word that you’re safe in the hands of the FIDC.




Out of sight, out of mind


I really think this is a big source of our growing carelessness with money.



How are you supposed to treat money as real when it’s nowhere and everywhere? How do you take money seriously when it’s all just a bunch of numbers?



We know that this is an attitude that lets people get into debt. They think of credit card purchases as something other than real money. They lose track of their spending. It’s just so easy to spend when it’s numbers, not bills.



And when the debt gets bad, those numbers become pesky or depressing or maybe even scary. So they ignore the numbers. Because how much can figures on a piece of paper really hurt you?



Eventually, this cavalier attitude was bound to spread to mortgages – especially in high-priced areas.



Housing in most metropolitan areas is beyond expensive. This means that mortgages are bound to be sky-high. Since those numbers were so ludicrously large, people were able to dismiss them as abstract. (I’ve noticed a strange trend: The bigger the number, the less real it is.)



The numbers were too big to comprehend, and so people didn’t try. They relied on banks to tell them what they qualified for. And that’s what they spent.



I think we all know how most of those stories ended.





So what now?


I’m not sure there is much of an answer. We’re not going to undo decades’ worth of technology so that money can be a more solid concept in people’s minds. But as long as we’re able to transfer huge sums with the click of a mouse or a swirl of a pen, money isn’t going to seem real.



A small start is what many of you are already doing: using cash whenever possible. But this system only makes a small dent. Even people who only use cash throw around an awful lot of big numbers.



Net worth. What does that mean? It certainly doesn’t mean they could cash out tomorrow. Often it includes a house (minus any remaining mortgage) and retirement accounts they aren’t supposed to access for at least another decade or two. But a net worth of $200,000+ sure sounds nice, doesn’t it?



Salary. It sounds impressive to make say, $60,000 a year. But is that really what you get paid? Yes, in a sense. But a more concrete answer is the amount you actually take home in pay. Planning out finances using pre-tax amounts is just budget suicide.



Debt. Some bloggers are tens of thousands of dollars in debt. Tim and I owe $12,000. I can’t even begin to picture what that looks like. To me, $12,000 is pretty abstract. It’s not real money. It’s money we owe. Money that's already spent, which means not actual cash.



Expenses. Can you picture what it would look like – your entire debt as a stack of bills? How about shelter costs? Can you picture paying your rent or mortgage in cash each month?



Fuel. What about gas? If you had to pay cash at the pump, would you be carpooling more? Would you have traded in for a smaller, more gas-efficient model?



In all, it just makes me wonder: If we didn’t have credit to fall back on? Would people be better or worse? (Tim would be worse off: We financed his expensive oral surgery and dentures on a card.)



Would no credit help inflation? Hurt it?



Most importantly, would people have a better sense of fiscal responsibility? Would they be less prone to thoughtless consumerism? Or would innate greed simply find another way to come out?



These are questions I do not know the answers to. But I feel like I should. What about you?



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7 Comments:

Blogger Shevy said...

Part of the reason money doesn't seem real is that most of it isn't!

Say you have $100 in cash and deposit it in the bank. I go to the bank for a loan and the bank loans me $80 of your $100 (which they're allowed to do). I deposit the $80 into my account at the same bank and write a cheque for the $80 that I mail to the gas company.

The bank now loans out $64 of the $80 to yet a 3rd person, who also deposits it into an account at the same bank.

Let's step back and take a look. There was only ever $100 in actual hard cash. But right now your account balance is $100, mine is $80 (until the gas company cashes my cheque) and the other guy's balance is $64!

That adds up to $244, but there's only $100 in cash actually available. Multiply that by the number of people in the US and Canada putting money in the bank and taking out loans.

This is why a run on the bank is disastrous. If all 3 of us in the example showed up at the same time and tried to withdraw our money, what would the bank do?

Declare a bank holiday, lock the doors, put up a sign that says we have to wait 10 days and run like crazy to the government to get the cash from the CDIC or FDIC (who would just have the Treasury print up the money).

If you or I managed our money like that they'd toss us in jail.

September 17, 2008 at 11:29 PM

 
Blogger Abby said...

Shevy,

I completely agree.

I actually had that in the original post. But I wasn't about to make everyone read 2500+ words (this is long enough as it is and it's about half that). So I dropped the point about how strange a society it is that the banks can not have our money on hand and we know this and are okay with it.

I also had some fun using Terry Pratchett's latest book (which is about banks) but, again, space is a precious thing. even on the web. Though if anyone hasn't read it, I highly recommend it, esp in light of current situations. There's a great line in there to the effect of, "So we're telling people, 'We'll honor this money and give you its value in gold, so long as you never actually ask for it.'?"

September 18, 2008 at 1:09 AM

 
Blogger Bonochick said...

"In all, it just makes me wonder: If we didn’t have credit to fall back on? Would people be better or worse?"

Credit is a beautiful thing...as long as people can manage it and not get carried away. For example, I had very expensive car repairs in the spring. I did not have enough money in my savings to cover it right away. I was able to open a credit account and have my repairs put on it...with no interest for 90 days. Before those 90 days were up, I was able to save enough from paychecks to cover what my savings couldn't.

Without credit, I would have had to wait on those car repairs that I really needed. However, credit also could have put me in a mountain of debt if I hadn't been able to come up with the rest of the money in 90 days or if I had been late with a payment (the interest rate would have been VERY high, of course). I did the same thing when I had my wisdom teeth removed. There was a large portion that my insurance wouldn't cover, but I was able to secure a credit plan with 12 months no interest. I hated having to open up new credit accounts just for those things...but that was really my best option each time. I have another one of those going right now, this time for a computer. Dell gave me 12 months no interest. I will have no problem paying it off before then, and I make sure to make my payments at least two weeks in advance to ensure there are no problems with being late and getting hit with that high interest rate.

I also understand that people get into situations like that who are responsible and have the best intentions...but sometimes life throws curveballs that would make a person unable to meet those interest-free terms. That's what's scary...the possibility of what else is going to come up unexpectedly that needs money.

September 18, 2008 at 6:30 AM

 
Blogger DogAteMyFinances said...

I'm down a few grand or something.

With a hurricane rolling through my family, it doesn't even register as important.

September 18, 2008 at 7:28 AM

 
Blogger blueviolet said...

We've been living without credit for the last 1 3/4 years and it's not fun and it's not easy when never having done that before. Needs are minimized and wants are non-existent. It's the best thing we've ever done though. We can actually see progress toward getting out of debt now. There's light at the end of the tunnel.

September 18, 2008 at 4:00 PM

 
Blogger Donna said...

Without credit I'd have been in a world of hurt when I filed for divorce -- the lawyer billed by the MINUTE and require a credit card on file. Any time the retainer went below $500 they'd charge it back up again.
It took me a while to pay off that credit-card debt since I was not working full-time. Best money I ever spent, though.
Another example: Years ago when I was living in Alaska my father was suddenly hospitalized with encephalitis. Because I had a credit card, I was able to fly there on short notice (vs. what was then called "30-day advance purchase" -- Expedia et al did not yet exist), and then rent a car when I landed.
Now my card debt is gone and I have a part-time job writing the Smart Spending blog (http://blogs.moneycentral.msn.com/smartspending). I use the credit card for even tiny purchases because I get mileage that way. Right now it's getting a bit of a workout because of health problems; I'm charging all my co-pays and my uninsured portions.
Credit can be a great tool, but I will never buy what I can't pay off in full at the end of the month. Unless, of course, I have to get divorced again. ;-)

September 19, 2008 at 9:37 AM

 
Blogger Foxie said...

I love what you say about money not being money but just being numbers... That's totally how I feel! I have so many accounts that I shuffle money back and forth to, that I never actually touch the stuff other than taking out my lunch money from an ATM... It was ridiculously easy for me to spend $1300 on a new computer because it was just numbers, really... I'm sure I would have been much more attached had I had the cash in hand. (Don't get me wrong, it was tough to spend that much, but I really had to and I don't regret a single penny of it!)

September 19, 2008 at 8:33 PM

 

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