Saturday, September 20, 2008

Chaos or "It's Only Money"

It’s just your money, not your life. Everybody who really loved you a week ago still loves you tonight.

--Louis Rukeyser, after the 1987 stock market crash.

I have been thinking about Chaos Theory with respect to the turmoil in the financial world this week, something like an analogy to the Butterfly Effect. A man in Temecula doesn't make his monthly mortgage payment and soon large investment banks on Wall Street come tumbling down. While I have been writing about real butterflies on this blog, I will always remember this summer as the summer I spent at the bank. No, I did not have any accounts at IndyMac, but I do and did at Downey Savings. And it gives me small comfort to know that the big guys have no better insights into the financial future than I did as when Bank of America offered to buy Merrill Lynch at $29/share this week, and then just a few days later the stock fell to $17.50/share. But what's a few billion among friends? Anyway, as of this writing, the deal may not go through because of the proposed bailout by the U.S. Taxpayers.

Such has been the roller-coaster ride the financial world (and most of us along with it) has been on all summer. When I learned that Downey's stock was selling for $1.06 in July, I suddenly woke up to the fact that this whole thing could affect me and my little nest egg. And I soon learned that extricating yourself from a bank is no easy matter in this day and age where computers and the Internet have changed the face of just about everything. There's online banking, direct deposits, automatic payments, linking of accounts, safety deposit boxes which are not insured, etc. I spent hours, no days, researching banks at, then at various branches in my area trying to find safety. Did I want to put my money in B of A? The guys who bought Countrywide? How about WaMu? I got a crash course in FDIC rules, sub-prime mortgages, and CDOs. As one banker told me, "We are all learning from this experience." Here is a cartoon version of the road to ruin the financial markets have been following. (Caution: strong language is used at the end. This cartoon is not for kids.)

When news of AIG's imminent failure (take your pick) surfaced last weekend exposing the extent to which the bad debt had wormed its way into our financial structure, I decided to get down these glasses that a grateful friend gave my husband years ago as thanks for a hot stock tip. I was looking for some perspective. The glasses show graphs of the Dow Jones Industrial Average (DJIA) starting with the year 1885 and continuing through the crash of 1929 to the year 1981. I had hoped to soothe my nerves by seeing that after the big crash, things got back to normal only to find that stocks rose for half a year (each of the vertical lines represent a year) followed by a huge, steady decline leading to what we now call the Depression two-and-a-half years later. Not encouraging news. The Depression was followed by WWII and things really didn't start to boom until after Pearl Harbor. (There is a rise and fall between 1935 and 1938 that is not explained on the glass.) And the DJIA didn't return to it's pre-crash high of 380 (yes, 380!) until 1955. But the most interesting climb is not on the glasses at all. There has been a stupendous rise since the 1980s as shown here. The Dow just closed on Friday at 11,388.44. Talk about a wild ride. But I suspect that this is where we will have to look for an explanation of the causes of the current crisis.

Meanwhile, I received an offer from another S&L this week for very high interest rates if I will put new money into CDs with them.

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