Welcome to the Carnival of Personal Finance!  It’s officially Cyber Monday 2008, the online doppelgaenger to Black Friday.  This term was coined by the American Retail Federation three years ago after a majority of online retailers saw their sales go up the Monday after Thanksgiving.  Snopes found that the busiest online shopping day is not Cyber Monday but a couple of weeks after.  Regardless of whether online shoppers are only lukewarm about today, one thing’s for sure: there’s way less danger of getting injured by an online shopping cart.

So enjoy the Carnival, and head over to Amazon or eBay with full assurance that the Internet will completely protect you from e-bruising by other online shoppers!

Posts on Budgeting

• Mighty Bargain Hunter gives ways to save on food, clothing, and shelter.
• Canadian Dream: Free at 45 reveals his spending weakness.
• Studenomics asks if you’re cash-strapped this holiday season.
• M is for Money talks about zero-based budgeting.
• Green Panda Treehouse asks a hard question: “Do you pay your mortgage or your medical bills?”
• Penny Jobs asks a good question for tough times: “What can I cut back on?“

Posts on Career

• Economic Crunch runs through a checklist for taking advantage of benefits on a new job.  (These things can be a nice supplement to your salary.)
• Monagomoney offers parallel advice with five things to do if you get laid off.  (Hopefully you’re not needing both this advice and the previous advice in the same day.)
• Dog Ate My Finances (ha!) will take Common Sense for $200, Alex.  (Note:  Careful punctuation is crucial in this blog’s tagline.  Imagine, if you will, a misplaced colon: “Mid twenties.  Big salary.  Paying for some mistakes:  a wedding, and life.”  The name would then have to be changed to Alimony Ate My Finances.)
• Beating Broke asks: “What is freedom worth?“

Posts on Credit and Debt

• Free From Broke chats about medical treatment and how it can affect your credit.  (Especially if the costs are big.)
• Credit Toolbox discusses some aspects of refinancing consumer debt.
• Blueprint for Financial Prosperity has a list of 0% balance transfer offers.  (Fifty different offers.  You should be able to do a 0% transfer of the national debt with this volume of plastic.)
• Ask Mr. Credit Card: “Should teenagers have credit cards?”
• Discover Debt Freedom has some advice for someone trying to get out of debt for the first time.
• Single Guy Money has a credit score checkup.
• My Family’s Money talks about two states’ propositions on payday loans.
• Destroy Debt discusses debt settlement and some factors to consider before doing it.
• Think Your Way To Wealth gives a closer look at the Baby Steps plan.
• Debt Goal tells how to say “no” to your children this holiday season correctly.

Posts on The Economy

• Wide Open Wallet has some ideas as to what the government should be doing during the recession.  (I have my own thoughts but I like to keep this blog clean.)
• Everyday Finance – the Blog of a Thousand Tabs — has some choice words to say about repricing employee stock options.  (Ahh, stock options.  What a cool dream.)
• Amateur Asset Allocator postulates on what a privatized social security system would look like.
• Funny about Money observes that the Dow is up, in spite of it all.  (Yeah, I don’t buy it either.  The market’s always right, but remember, it’s still down over 5,000 points from its high.)
• Frugal in the Fruitlands reviews The Two-Income Trap.
• The Sun’s Financial Diary reports on the extent of the malaise in the banking industry.
• Earn What You Spend discusses some of the relevant financial news as the incoming administration gears up.
• No Credit Needed questions whether spending patterns are in line with the direction the economy is heading.
• Brip Blap gives a superb answer to the question: “Do you need a bailout?“

Posts on Finance

• The Strump wonders why we don’t like to talk about money.  (It’s dangerous, especially if you were wise enough to sell your stocks a while back.)
• InsureBlog discusses discounts and medical plans.
• Accumulating Money talks about Social Security insurance.
• Harvesting Dollars suggests making this year’s bonus season different.  (Assuming you get a bonus, of course.)

Posts on Frugality

• Just Thrive explains three rules for giving the perfect gift without necessarily spending a lot of money.  (Money is tight, so make the most out of your gift-giving.)
• Debt Free Saver has a very simple suggestion for holiday gift-giving.  (It gets back to the basic of gift-giving!)
• Money Ning asks whether we always think that saving money is worth it.
• Monroe on a Budget rattles off some practical Christmas gift ideas.
• The Smarter Wallet has some tips for the early-bird traveler.
• Online Saving Blog tells how to avoid the Black Friday hype.
• Uncommon Cents discusses personal opportunity cost.

Posts on Investing

• Investing School explains the important aspects of bond funds.  (I love how he reminds us that even US Treasuries can default. I happen to agree, but rates will go way up before they do that.)
• Crash Market Stocks goes through the basics of buying and selling options contracts.
• The Financial Blogger wonders if the Dogs of the Dow have had their day.
• Intelligent Speculator questions whether corporate bonds are really safer investments.  (Than, say, Forever Stamps.)
• Dividends4Life discusses how to manage your dividend portfolio in a downturn.
• Four Pillars discusses whether we’ve reached the death of index investing.
• ABCs of Investing gives a quick tutorial on index funds.
• Dividend Growth Investor discusses why companies should pay dividends.
• Greener Pastures talks about the Standard & Poor’s Aristocrat Indexes.
• Monevator shows how to get rich by playing a video game.  (Nice spin on things.)
• Cash Money Life recommends making some year-end retirement account moves.
• The Dividend Guy sold some dividend cut stocks.
• The Dough Roller asks if you follow the 50-50 rule of mutual fund investing.  (Click to see what the fifties are.)
• No Debt Plan continues the “No Debt Plan” series with a post on investing for retirement.  (Very nice post.)

Posts on Money Management

• Crackerjack Greenback questions whether you can really trust your financial adviser.  (It makes good sense to follow the money.)
• Smart Money Daily takes a look at whether winning the lottery is all it’s cracked up to be.  (After reading the post, I’ll probably never buy a lottery ticket.)
• About.com Financial Software lists eight good iGoogle financial gadgets.
• Wisdom Journal lays out ten economic truths we cannot ignore.
• Christian Personal Finance advocates letting your finances see the light of day.
• Sound Money Matters asks: “To gift card, or not to gift card.“  (That is the question.)
• American Consumer News doesn’t buy the two months’ salary thing.  (I don’t either.  But if I were a high-powered CEO with a yearly salary of $1, well … “Here’s your Secret Decoder Ring.  Will you marry me?”)
• My Wealth Builder lists a few personal finance strategies that have helped during times of economic crisis.

Posts on Real Estate

• Living After Foreclosure has some suggestions if you’re facing foreclosure.
• Insurance Toolbox comes through with seven practical tips for reducing your homeowner’s insurance expense.  (Some of these tips have other good side-effects in addition to lowering your insurance bill.)
• Growing Money Blog posts a rental property update.

Posts on Saving and Taxes

• Stumble Forward gives five tips to creating a stellar emergency fund.  (Covers the basics well.)
• Blogging Banks posts the best CD rates around.
• Dollar Frugal is sounding the charge and telling people to continue hypermiling.  (Great advice.  Gas prices are low because of the recession.  They’re still going to go way up as supply crunches hit.)
• The Happy Rock pits Black Friday against Buy Nothing Day.
• Deposit Accounts talks about flexible spending accounts.
• Money Smart Life compares a couple of online bank accounts.
• Saving To Invest has some end-of-year tax tips, among other things.  (Gee, I can’t imagine anyone would have capital losses this year to deduct, as kind as the market’s been to people, but just in case you do …)
• Online Banking Blog shows how to choose the best bank account.

Other Posts

• Happiness is Better lists three keys to banana-free living.  (Sounds a-peeling.)
• Curious Cat discusses a financial Thanksgiving.
• Free Money Finance asks if you’re using your dollar coins.  (All the time, man!)
• Chief Family Officer has an emergency preparedness checklist for personal finance matters.
• Digerati Life wonders if there’s any good time to start a business.
• Budgets Are Sexy is uber-tempted by sales e-mails.
• Living Almost Large asks if one should feel guilty for success.  (Absolutely not!)
• Prime Time Money gives six ways to argue less about money.

Even Though Real Estate is Gloomy, Opportunities Will Present Themselves

The negative news in the real estate market continues. Every week it seems like a new report is out highlighting record drops in home sales, lower home prices, and more difficulties in obtaining a loan. For those who already own a home, or are trying to sell their home, this is obviously a difficult time. I don’t want to dismiss the hardship that this crisis has created, but I am glass is half full kind of guy, so I wanted to highlight some of the positive aspects of what is going on.

Looking Ahead a Few Years

When will the real estate market settle down? That is the million dollar question right now, and there are a lot of different thoughts. And to make things more difficult, some areas of the country will begin to rebound faster than others, so without a crystal ball, the best we can do is guess. That being said, I think it’s fair to say that it will be a while before we see any significant improvement. Whether it’s a year or two, or five years from now, it doesn’t really matter. Trying to pick the absolute bottom is like trying to pick the day the stock market bottoms out. If you’re a little early or little late to the party, you’ll still be fine.

So, if you’re thinking about buying a house in the coming few years, you have a tremendous opportunity in front of you. In many cases, you could buy a home right now at a 25% or more discount from just a year or two ago. As prices continue to fall in coming months and years, you should find even steeper discounts. The good news is that there is no rush in buying. Even if home prices do begin to stabilize earlier than expected, they won’t immediately spike back up, especially with the excess inventory out there. This means that you’ll have a pretty long window of time where you should be able to buy your home without being concerned about skyrocketing prices or strong demand.

Start Getting Your Credit in Order Today

Even if you don’t plan on buying a home for another few years, it is never too early to begin thinking about your credit score and the effect it will have on your ability to secure lending. Banks have learned their lessons (at least I hope so), and that means we’re returning to times where credit is harder to get, and those with poor credit will find it extremely difficult to obtain financing, or may pay a significantly higher interest rate. This makes having a clean credit history more important than ever.

When it comes to improving your credit score, it’s important to have time. This is why it’s a good idea to start planning as early as possible. For one, if you have negative marks on your credit report, the only thing that will remove them is time. In most cases, seven years, or ten if a bankruptcy. So, check your credit report and look for negative marks. How long ago were they? If you have a late payment showing up five years ago and think you’ll be buying a house in about three years, it looks like that would be removed, and improve your score once it’s time to apply for a loan.

Even if you do have more recent dings on your score, the good news is that their importance diminishes over time, so that is still in your favor. Just make sure you don’t make any more late payments! In addition, if you have a few years yet and you currently have very little credit, you have time to open or close lines of credit as needed in order to maximize your score. Remember, length of credit history is also very important, as well as what types of credit you have, and the credit utilization. This gives you time to maximize those aspects of your report as well. Use this time wisely, and don’t wait until just before applying for a loan to begin thinking about your credit score. And don’t forget to check out these tips on how to improve your credit score.

Think About the Down Payment

In the past, it was common to put 20% down on a home. In the 90s, with rapidly increasing home prices and easy access to credit, this became less common, and many people were able to get attractive financing with little or even no money down. Of course, when your home is expected to increase in value by 20% each year, it made sense. As we’ve seen lately, having equity in your home from day one has many advantages, especially when it becomes clear that home values don’t always increase each year. Not only that, but putting 20% down can get you out of paying private mortgage insurance, or PMI. This keeps your monthly payments low, and helps you put more money in your pocket.

That being said, more banks are now requiring money down. There are still plenty of offers out there for zero or low down payment loans, but you’ll need even higher credit scores, and might pay a premium for those loans. Bringing money to the table will help you if you have less than perfect credit, and will help ensure you’re getting the best rate.

This doesn’t mean you have to spend years and years trying to scrape together $50,000 or more, but you have enough time to begin thinking about a down payment and to start saving up now. If you’re looking at a home purchase in the next few years, just saving a couple hundred a month can make a good dent in your down payment over time. Again, time is on your side here, and the sooner you can begin taking advantage, the better off you’ll be.

Don’t Screw This Up

If you don’t own a home and want to buy, or are thinking about upgrading in the coming years, this is a tremendous opportunity. You have just enough time to get your financial house in order so that you will be able to take advantage of the decline in home prices. Use this time wisely, and don’t screw it up. If you wait until the last minute, you’ll miss out on plenty of areas where you could maximize your purchase.

And above all, don’t make the same mistakes people have made in the past. Once the economy begins to recover, the stock market takes off, and home prices begin to rise again, it’s easy to forget about what got us into this mess. Remember, you buy a home for a place to live first and foremost. Find a home that is suitable for your needs, and understand exactly how much home you can truly afford. Don’t borrow too much, and don’t put yourself at further risk by taking on an exotic mortgage. And most of all, don’t go into your home purchase expecting the value to double in five years.

If you plan ahead, stick to the basics, and don’t get greedy, you’ll find yourself in a fantastic position. You’ll have a nice roof over your head, you’ll be able to weather future economic troubles, and since you were able to buy at a significant discount, you might even stand to make some money when you sell in the future. Opportunities to learn from past mistakes and to take advantage of relatively low prices don’t come along that often, so make the most of it.

Image credit: TheTruthAbout

Prospective Home Buyers, This is an Opportunity of a Lifetime - Don’t Screw it Up

With the whole mortgage meltdown and ensuing credit crisis, there is plenty of blame to go around. Even with shady lenders, complex loans, and loose lending requirements, most of this could have been avoided if people took the time to read, and more importantly, understand what they were signing. Most people simply don’t want to spend the time to sit there and read all of the fine print and those who do actually read it may not fully understand everything.

Don’t Be Embarrassed if You Don’t Understand

When someone explains something technical or difficult to grasp and then asks, “Do you understand?”, the response is typically “yes.” Either it is because you want to get through the process quickly, you don’t think it is very important, or you don’t want to feel embarrassed that you don’t understand a concept. This could end up being a costly mistake. If you don’t understand something or if you see conflicting information, it is in your best interest to stop and ask questions. It’s much easier to take a moment before signing to get clarification than to learn the hard way at some point in the future.

Information Included in the Fine Print

Most people are concerned with a few key areas of a loan such interest rate and length of the loan, but it is within the fine print of the promissory note or security agreement that contains the information that can really cost you money. The most common information included throughout the text will include:

• The promise you make to pay the lender a certain amount of money plus the agreed to interest rate.
• Whether the interest rate is fixed or variable — if variable, when does the rate change and by how much.
• The payment schedule.
• Charges for late payments.
• Any applicable grace period.
• If the loan can be paid off early and if any penalties are incurred for doing so.
• Whether or not security or collateral is required.
• Whether or not the loan can be extended.
• What happens if you default.
• What happens if you pay with a bad check.
• Can the lender take money from other accounts you may have with them to repay the loan.
• Who pays legal fees and collection costs.

Don’t Sign Anything Until You Completely Understand

While it pays to make sure you get a good interest rate with good terms, it is equally important to make sure you understand everything about the loan even if you don’t think it will ever apply to you. You have nobody to blame but yourself if you make a late payment and find out there is a $40 late fee. It would come as no surprise if you took the time to understand what you agreed to. In the event of a problem with your account, ignorance is not a defense. It may seem like a waste of time to spend an extra ten or fifteen minutes to read multiple pages of small text, but it could end up saving you money or problems somewhere down the line.

And finally, don’t feel pressured by the person sitting across the table who’s urging you to sign. Not everyone is out there trying to trick you into a shady loan, but you shouldn’t feel rushed if they are just trying to quickly get you through the process. They can wait, and you should take as much time as you need. If they brush off certain sections saying it isn’t important, just explain that you want to take a moment to look it over. A couple extra minutes will ensure that you aren’t missing some key terms on the loan and help you completely understand what to expect, and what the consequences will be if something goes wrong.

Read the Fine Print Before Signing Any Loan - You Might be Surprised at What’s in There

In a clear sign the federal government is far more concerned about the financial health of mortgage finance giants Fannie Mae and Freddie Mac than its public comments indicated as late as Friday, the U.S. government Sunday night announced what some are calling a “massive aid” package to the two shareholder owned and run companies officially cementing a government relationship that till now was only implied but never admitted to.
According to a Reuters dispatch, the plan, which will require swift approval from Congress, is designed to “head off a potential meltdown in financial markets.”

Here’s what the government is offering Fannie and Freddie:

1. Access to its emergency cash–the so-called discount window
2. A huge “temporary” increase in the line of credit available
3. The U.S. Treasury will, for the first time ever, purchase equity in both companies should it be needed
4. Investigation by the Securities and Exchange Commission to stop the spread of “false information.”

Both Fannie and Freddie are vital to the housing market–they buy mortgages from banks and other lenders and either keep them or repackage them into securities that are sold to investors.

“Welcome to the socialist state”

Strong words from some critics are already greeting the government plan. Josh Rosner, the managing director at Graham Fisher in New York told Reuters, “It’s outrageous. It’s offensive. Welcome to the socialist state. In capitalism, winners are supposed to reap rewards and losers are supposed to take losses for bad risk management. These are private companies.”

But others are deeply concerned that should Fannie and Freddie fail–though they both say they are well capitalized–the shockwaves would cause a financial meltdown world-wide.

The most troubling part of the government plan,perhaps, is the possibility the Treasury might buy equity in Fannie and Freddie. Some critics charge this could end up costing taxpayers enormous sums of money.

It will be interesting to see whether Wall Street gives the plan a thumbs up or thumbs down during Monday’s trading.

Here are 2 more articles worth reading:

• Government as the Big Lender
• Treasury Acts to Save Mortgage Giants

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

FEDS BAIL OUT FANNIE AND FREDDIE; EMERGENCY MEASURES TAKEN

INDYMAC IS OFFICALLY CLOSED!!!

In the past minutes newswires around the country and world are now reporting that the Federal Government has shut down IndyMac Bank and has handed it to the FDIC (Federal Deposit Insurance Corp.) as conservator.

Couple the shut down with the Fannie Mae/Freddie Mac troubles, and we’re in for some really rocky waters next week. I’m willing to bet a lot of money that the announcement was held back from being made prior to the close of the stock market because of fears of a massive crash. Well . . . I think we’ll be seeing that happen this coming Monday!

Fasten your seat belts, people . . . we’re in for a ROCKY RIDE!

IndyMac Bank’s assets were seized by federal regulators on Friday after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures.

The bank is the largest regulated thrift to fail and the second largest financial institution to close in U.S. history, regulators said.

Yahoo Finance

In the biggest bank failure of the housing downturn to date, federal banking regulators today closed IndyMac Bank FSB, naming the Federal Deposit Insurance Corp. as conservator.

The FDIC said it will transfer insured deposits and “substantially all the assets” of IndyMac Bank, to a newly created successor, IndyMac Federal Bank, which will be operated by the FDIC.

Insured depositors and borrowers will automatically become customers of IndyMac Federal, FSB and will continue to have uninterrupted customer service and access to their funds by ATM, debit cards and writing checks. Depositors of IndyMac Federal Bank FSB will have no access to online and phone banking services this weekend, but will regain access to them on Monday.

Inman News

IndyMac Bancorp Inc. became the second-biggest federally insured financial company to fail today after a run by depositors left the California mortgage lender short on cash.

The Pasadena, California-based bank specialized in so-called Alt-A mortgages, which didn’t require borrowers to provide documentation on their incomes. Its home state has been among the hardest hit by foreclosures.

Bloomberg

What’s next? Anyone?

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

BREAKING: IndyMac Bank is Shut Down and Taken Over by Feds

Fannie Mae and Freddie Mac, combined, own or back up some $5 trillion dollars of debt. That is about half of ALL the mortgages in the U.S. They have already lost some $11 BILLION since the current mortgage/credit crisis began, so it is easy to see why there is profound concern about their fiscal health–or lack there of.

Concern turned to horror today after the New York Times reported that the U.S. government is thinking about a takeover of the mortgage giants–placing them in a conservatorship.

Should that happen, the shares of both could be worth almost nothing and taxpayers, you and me, would have to pick up the tab, says the Times, for “any losses on mortgages they own or guarantee–which could be staggering…”

This news brought about what the AFP news agency referred to in a headline as a “meltdown” of the share prices of both Fannie and Freddie.

According to Reuters, “Fannie shares closed at $10.25, down some 22 percent but well above the session low of $6.68. Freddie closed at $7.75, down 3 percent, after touching a low of $3.89 earlier in the session.”

And, here is the most amazing part of the story. Freddie and Fannie have lost almost 90 percent of their enture value just since August, says Reuters.

Doubts about bailout

As the day drew to a hectic close, Treasury Secretary Henry Paulson sent out signals that it is not likely there will be any federal bailout–However, Sen. Christopher Dodd of Connecticut, who is chairman of the Senate Banking Committee, said he spoke with both Paulson and Fed Chairman Ben Bernanke and that they are looking at options that would include “opening access to the discount window,” Reuters reports. The discount window allows the Fed to act as an emergency lender for the banking system.

Meantime, both Fannie Mae and Freddie Mac insisted they have enough capital to keep going and Sen. Dodd said both are “fundamentally sound and strong.”

Although both were originally formed by the federal government, they now function as private corporations, though there has always been an assumption that the government would never let either go under for fear of what might happen to the entire financial system in this country and, indeed, around the world.

How they got into trouble
To understand how they got into trouble, you must first understand what it is they do. Both buy up literally hundreds of billions of dollars in mortgages–then repackage them as securities.

In some cases, they hold on to these new securities, but they also sell them to investors.

That is why when the subprime mortgage crisis hit,Fannie and Freddie were hit hard. And, says the New York Times, “analysts expect the companies to announce a new round of write-downs and possibly be forced to raise capital by issuing additional shares.”

Stocks tumble then regain

At first, the fears of a Fannie/Freddie implosion plunged the Dow Jones Industrial Average down more than 200 points…but, by the end of the trading day, it closed down “just” 128.48 points.

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

Fannie Mae & Freddie Mac: What Will The Feds Do?

I made 12 phone calls today. 2.5 hours of talk time. Here’s what I learned:

1. All mortgage companies cost the same-ish.  If their rates were lower, their closing costs were higher.  If their rates were higher, the closing costs were lower.
2. Some mortgage companies sell your loans.  3 of the mortgage companies I called today gave me an unsolicited aside:  “We buy loans.  We don’t sell them.”  Does that mean that you should always go with a direct lender?  Nope.  It just means that the mortgage company might not be able to view or change things if the mortgage is owned by someone else.
3. You don’t need to give out all your information (address, social security) to get rates and closing costs.  You can get ballpark numbers as long as you provide the purchase price, the down payment amount, and the type of mortgage.
4. If you call a company and they won’t give you any estimated numbers without giving all your information, hang up.  Call again.  A different mortgage specialist will be glad to help you without giving all your information.
5. Closing cost fees are where you can differentiate a mortgage company from another.  Ask the mortgage people to break down their closing fees.  Fees can include:
   • Property appraisal
   • Credit report
   • Lender’s inpsection
   • Mortgage insurance application
   • Assumption
   • Mortgage broker fee
   • Tax related service fee
   • Application
   • Commitment
   • Rate lock
   • Processing
   • Underwriting
   • Wire transfer
   • Abstract or title search
   • Title examination
   • Document preparation
   • Notary
   • Attorney
   • Title insurance
   • Recording
   • City/county tax stamps
   • Transfer tax
   • Survey
   • Pest inspection
   • Condominium application
   • Prepaids for interest
   • Prepaids for hazard insurance
   • Prepaids for property taxes
   • Prepaids for mortgage insurance
   • Prepaids for flood insurance
6. The rates and payments assume you have great credit and good stability.  They want to quote you the best rate and closing costs possible so they pretty much assume you’re a model citizen.
7. Lenders don’t like it too much if you’re quitting your job and you don’t have a job secured yet.  Hopefully you have a wife or wife-to-be who looks more stable to lenders.
8. They ask you if the down payment is gift money or if you saved it on your own.  No one gave me a clear answer on why they ask that question.
9. Do your research even if your wife-to-be’s sister’s soon-to-be husband is a mortgage specialist.  You never know…
10. Every mortgage person you talk to will give you a piece of advice.  The advice that resurfaces the most is probably important.

Did I apply for a mortgage yet?  Nope.  This whole day just narrowed down my choice to 2 or 3 mortgage lenders.  Time to talk to Miss Soon-To-Be-Wife…

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What now? I’ve put off writing this article for a while. Like many of you out there I’ve watched the Dow retreat in huge, wealth-destroying, multi-hundred-point chunks. Every time it looks like the end is in sight it takes another single-day 5% lurch in the wrong direction. Not a pretty sight.

A couple of weeks ago I attended the annual meeting of the National Association of Business Economists in Washington D.C.. The event featured some interesting speakers, including recent Nobel laureate Paul Krugman and Fed Chairman Ben Bernenke. After a day of hearing smart guys w/ lots of letters after their name wax poetic about credit default swaps, mortgage backed assets, and government bailouts I came away with a single conclusion: no one knows how this thing is going to turn out. There was some suggestion in using the word “bailout” the Treasury did a poor job in selling the $700billion plan to the American public – perhaps “rescue” would have been more appropriate. Krugman added some levity by suggesting some media-friendly nicknames: how about “Bailie May?” Or perhaps “Hanky Panky” after Treasury Secretary Henry Paulson.

So I came away from the three day event with a more profound understanding of my failure to understand this whole mess; but I don’t feel particularly bad about it because no one else really understands it either. Bernenke’s reassuring message: we don’t really know how we’re going to price these distressed assets that the Treasury is gonna be buying with your $700 billion, and we don’t know who we’ll by them from or how we’re going to do it. This will be a trial and error process. But we’ll work it out.

Mmmmmkay. But Bernenke delivers the message with such an aura of academic cool that the audience seemed assured that he’ll succeed in making the best of a bad situation.

So, generally speaking, I’m not feeling to great about all of this. Basically I think we’re headed into one of two possible scenarios:

• Scenario 1: We’re already in a recession but we’ll muddle through. The market is cyclical. This is a particularly brutal cycle we’re dipping into, but fundamentally no different than those we’ve slogged through before. We’ll get some discouraging GDP numbers, the Dow with flit around 9,000 for a while, but eventually the market will give back some of that money it’s taken out of your 401k plan.
• Scenario 2: The wheels are about to come off. The banking system is not just in a superficial funk fueled by poor investor-confidence; it’s really in trouble. As banks write down toxic mortgage backed assets their balance sheets will be fundamentally damaged to the extent that credit will continue to tighten, consequentially decreasing spending, chopping profits, raising unemployment, and fueling foreclosures – which in turn worsens the state of the mortgage backed assets which started the whole mess. Repeat. Deflating prices, which initially feel kinda good (who can argue with $2.50 gas?) accentuates the woes of the business community which will be unable to justify new investments at lower revenue levels, further cutting business spending and jobs, pushing down demand, and deflating prices further. Repeat. Once you’re in this spiral it’s tough to engineer an exit.

Now I think (hope) that we’re in scenario #1. That’s the best case. I don’t think we’re headed towards the meltdown case, but it is something that I worry about. As further evidence that I believe in scenario #1 I recently made two long term trades, buying exchange traded funds (ETF) that track the S&P (RSU) and the Dow (QLD). Someday we’ll look back at 2008 and realize that the dow in the 8,000’s was a buying opportunity.

A few observations:

• You know this already, but if you’re going to need your retirement money in the next few years then you can’t have it socked away in the stock market.
• If your company 401k plan automatically loads you up with company stock, then you need to periodically go in and rebalance. I never cease to be amazed at smart, educated folks who have 40% of their wealth in a single stock. This is goofy.
• Rethink “diversification”. I have stocks divided between small-cap funds, large-cap funds, value funds, growth funds, and international funds. They’re all in the same toilet now. One lesson of the current crisis is that markets are now linked like they’ve never been linked before.

And yes, this is a real estate blog, so a few thoughts here:

• Hooray for Texas: We didn’t run up during the boom so we’re not getting whacked right now, but I’m expecting flat prices for a while. My strategy for finding and investing in long-term value projects is treating me pretty well right now. Plus, that’s a hunk of money I have in properties instead of in the stock market. This is effective diversification.
• Some markets really are feeling the pain. I was in Minneapolis last weekend, and as I walked the streets of some of these neighborhoods it seemed like every third house was a foreclosure. It’s gonna take a while for the market to absorb this carnage.
• All real estate is local – that is, unless the economy is melting down. I won’t be feeling so smug about Texas property values if we got into the doomsday economic scenario that I outlined above. If the banking system goes into the tank then we’re all gonna be in the same boat.
• A buying opportunity? I’m nervous about our economy, but I’m not quite ready to bury my life savings in coffee cans in my back yard. Investors who can still get loans should think about investing now, depending on how your local market conditions look.