By now, unless you have been living in a cave, you are probably very aware of the economic crisis that we have now impacting Wall Street (Main Street of course had been impacted for awhile). Whether you agree with the "bailout" or "rescue plan" or "pile of cow patties", we can all agree, that this is a crisis at some level. For those of us who are not economic experts (and even they are split) make we do need a " Economy for dummies" manual. However, in lieu of this, please refer to the ABC Cartoon explanation of the Credit Crunch we are facing and what we may see further down the road if the government doesn't act appropriately.
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Here is a clip from The Economist
SUSPICION of banks is a recurrent historical theme, from President Andrew Jackson’s opposition to "money power" in the early 19th century, to the British Labour party’s suspicion of the "bankers’ ramp" that forced it from office in 1931.
So there is a natural temptation to think that the current crisis may be entirely artificial, a device dreamed up by bankers to help them out of a hole. But if there is a conspiracy, it is extremely well organised and extraordinarily risky.
The money markets are a bit like the sewers of the financial system: in normal times, nobody notices them but when they get blocked up, the stench is abominable. And they are severely congested at the moment. The good news is that, unlike last week, it is possible for banks to borrow overnight at a reasonable rate. The bad news is that borrowing at longer rates is either impossible or prohibitively expensive.
At that level, it is simply uneconomic for banks to lend money to customers. So they won’t. Banks are getting by on borrowing overnight, but the markets for one and three-month loans have dried up. That explains why central banks have been forced to offer billions of dollars at those maturities.
This cannot last long without causing immense damage. Companies will be unable to raise new money and, more importantly, refinance old loans. Corporate bankruptcies will soar. Consumers will also find it difficult, or expensive, to borrow. The result will be a sharp downturn in demand that will push the economy into a deep recession.
So some kind of bailout deal is necessary. Whether all the details were right is, at the moment, secondary to whether it does the trick. And the trick will be the restoration of confidence in the banking system.
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Suze Orman on AC360 CNN
Suze Orman
Personal Finance Expert
Q: How worried should people be right now? Not only about stocks but mutual funds, portfolios, 401(k)s, jobs?
They should be worried about everything. And they should be so worried, not that we should start a panic, that they really start to truthfully change their behaviors.
They have to realize that nobody is joking here. They can’t continue to go out to eat, charge it on a credit card and then just pay the minimum at the end of the month. They have got to go into a different type of financial mentality,
I have to tell you, I don’t think that has sunk into them yet. so a few more days like this a few more things coming down the pike, they may go ‘oh, my God, we may be in serious trouble here.’
Let’s start with bank accounts. If you are within the FDIC limits of a bank account, if you happen to be at a credit union, if you’re within the limits of the NCUA (National Credit Union Administration), you have to understand your money is absolutely safe and sound. The $100,000 per account.
Here’s what everybody needs to do, especially with FDIC...
Go to myFDICinsurance.gov, use the calculator program they have, so you know... without a shadow of a doubt... that your money is insured. You cannot take somebody else’s word for it. You need to worry. So just take a few steps to make sure that your money is in institutions that are insured; you are within the insured limits and that that money is safe and sound if you are, this doesn’t matter to you in that way. If your bank fails, the FDIC will step in. They have the money. They’ll be there for you.
As for portfolios, mutual funds, bonds and such ... there you’re seeing a situation where we’re going down, down and down. If you have 10, 20, 30 years until you need the money and you invest in good quality stocks, mutual funds, exchange traded funds, you have to continue to invest. You have to continue every single month going into the investments that you’re in if they’re good.
However, if you are older, and counting on this money (you need this money for retirement) that is money that never should have been in the stock market to begin with.
Your rule of thumb is money that you need within ten years is not money that belongs in the stock market because of the deterioration we have seen and will continue to see if they do not get their act together.
If you think this day was bad, what you may see if these people, the administration, do not get their act together so to speak... you could see another 2,000, 2500 points (lost).
Even more of her interview on CNN here
Just some additional info for you.