If it hasn’t become blindingly obvious over the past week, the economy is in some serious, serious trouble. A couple of weeks ago, I wrote about how the housing crisis had taken its toll on Wall Street, and in the ensuing time it’s become obvious that the housing crisis was a lot worse than I had hoped it would be. The Dow is down, stocks are down, and we have yet to see just how badly shareholders are going to get hit. While I generally comment about stocks you should or shouldn’t be interested in, I’m going to break with tradition and give you some tips about what to do in the short term and long term to help you keep your shirt, along with your money and hopefully your home. 

My first bit of advice is simple – don’t cash out your stocks or IRAs. At this point, the urge to cut your losses and run is strong. Take a deep breath before you call your broker, though. Unless you’re heavily invested in banks, this loss may only be temporary. Even if you are invested in banks, at this point no one has any idea of who will need to be bailed out, and who can stand on their own. If several people sell off their stock, though, the stock price will sink due to lack of confidence, and the bank’s need for a bailout will be that much more likely. Obviously, if you have stock in a company that is overtly in trouble, you should sell. Don’t confuse a downturn with imminent collapse, though.  

Next, elect a competent leader. At this point, I defy anyone to say George W. Bush has handled the country’s finances well. Let’s ignore, for the moment, the deficit spending and his continued asking for money from Congress to keep the Iraq war funded. Let’s focus, just for a second, on Bush’s corporate record. He was the founder of Arbusto Energy, later Bush Exploration, which was swallowed up by Spectrum 7 when it was on the brink of financial collapse. Bush got to be the chairman of Spectrum 7, which also suffered financially before it got swallowed up by Harken Energy.  

His time as Texas governor didn’t have much negative impact on the economy, but when he became president he eliminated that annoying budget surplus by giving it away in the form of a tax cut. He has also constantly pushed for deregulation of businesses and industry, which is part of the cause of the housing collapse. His great solution is for Congress to give Henry Paulson, the current Treasury Secretary, $700 billion in order to bail out any bank that wants it. What Bush and Paulson don’t want is any oversight whatsoever. The money would be doled out entirely at Paulson’s discretion. The CEOs who ran these companies into the ground would get their same salaries, their same golden parachutes, and the same lack of consequences as they’ve been accustomed to. Paulson, by the way, is against shareholders benefiting as part of the bailout because he believes it would lessen the shareholders’ sensitivity to risk. Evan Newmark of the Wall Street Journal urges Congress to shut up and give Paulson the $700 million, because we might get “really lucky” and he’ll be able to fix this mess. With all due respect to Newmark, who I’m sure has a Ph.D. in economics and several friends who are CEOs themselves, Wall Street’s philosophy has hinged on being really lucky. Why not try an actual plan for a change?  

Finally, learn from history. It’s not as though we haven’t gone through this before. The stock market crash of 1929 was fueled in part by rampant speculation, and borrowing money in order to make money on a stock market most people believed was never going to go down was common. Eventually, it did, and of course people and companies lost millions, which was actually a big deal back then.  

If that goes too far back for you, think back to the halcyon days of 2000 and 2001, and a company called Enron. It also bartered that its stock price would never go down, and suffered when it did. If you’ll also recall, its upper echelon got away remarkably consequence-free. You can argue that Ken Lay and Jeffrey Skilling, among others, did face court sentences and prison time, but they’ve so far managed to keep the profits they made while in Enron, while the rank-and-file workers ended up with nothing.  

The point there is that, in both instances, people bet heavily that the stock market would never ever go down, despite all evidence to the contrary. The point is that, eventually, the stock market will recede, and if you, like thousands of other investors, bet against that fate, it’s going to come back to haunt you. Make smart investments, ones that take into consideration the fact that the market rises and falls, and remember the old saying that if something seems too good to be true, it probably is.  

Of course, there are a ton of practical things you can do, such as not quitting your job, minimizing your debt load, and cutting back on your expenses. I’d advise you to make a habit of all three, frankly. While this current downturn may not be as bad as the Great Depression, if you’re not careful you may end up sympathizing with the folks from that time.  

Chris Gottschalk
Analyst, Oxbury Research