Private Equity/Venture Services

Financial times are tough, but let's take a step back. Rather than making things worse for ourselves by stashing all our savings under the mattress, let's take a deep breath and look at the situation.

Fed by a culture of consumerism, our real estate and other consumer credit-based markets have been lending at very high levels for years. Loan-to-value ratios have been way out of whack. (There are very few scenarios in which it would be financially responsible for a new college grad making $70,000 a year to take out a $400,000 mortgage and a $50,000 car loan.) In order to spread the risk relating to these loans, banks have entered into swap transactions and myriad of collateralized debt transactions and otherwise sought to offload the risks onto other players in the market. This is a massively over-simplified explanation, but clearly this cultural phenomenon had to come home to roost at some point.

So let's look at some of the consequences. The real estate markets have crashed. Large investment banks and insurance companies have failed. Some were "bailed-out." Others were not. Some major mortgage market players such as Fannie Mae and Freddie Mac joined the spiral. Deposit banks looked like they might fail, and that's when we really saw things become interesting in terms of government involvement. Rumors of a "bail-out package" began to circulate long before we saw the first four-page draft (which was 451 pages in its final form - the KISS principle went out the window on that one). People began to worry about the security of their money in the banks. FDIC limits were raised. Some of us felt better.

Early on in the "financial crisis," the fear showed itself in relatively small changes in the Dow, often in response to the most recent headline failure of a financial institution. But it has now gotten to the point where Dow-watching is a sport. How many times in the last three weeks have you walked into someone's office to find them staring fixedly at Yahoo Finance? How many people do you know who have taken a large portion of their savings out of the equity markets and put it into government bonds (or their pillow cases)? How many people do you know who have suddenly become part-time day-traders? In my view, all of these developments are disturbing and, even worse, are contributing to the problem.

The Dow has fluctuated wildly every day for the last few weeks. If you have any concern for your blood pressure, it's best not to follow it too closely. Talk to your financial advisor. Don't panic. The recent removal of large amounts of capital from the equity markets have significantly depressed the returns on government bonds. While short-selling has been restricted, the increasing speculative trading only exaggerates the market's swings.

Now, I am by no means a financial advisor, and I make no claims to any ability to see the future (through the stock market or otherwise), but I can see the past. Our economy has seen every form of up and down, from the Great Depression to the dot com bubble. None of the extremes have been a result of people acting rationally and in their own long-term best interests.

The fundamental fact is that our markets will recover. The questions are, how long will it take and what will we have to do to get there. In the meantime, let's try not to exacerbate the problem.