Crisis: Real or Manufactured?

By Bridget Mermel, CFP®, CPA, MA posted 07-29-2011 06:28 PM

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Dear Bridget,
Is there anything we can/should do about the pending
debt-ceiling deadline? Should I be getting cash out of the
bank to pay for bills and groceries, for example? A recent
article I read makes me kind of anxious. It says that if the
politicians don't figure something out, banks will be SOL
leading to a massive cash-run on banks.

What do you think?

Sincerely,

Dumb questioner of the week

Dear DQOTW,
This isn't a dumb question!

With the pundits out there beating fear drums, it's difficult to ignore the drama playing
out in Washington. Talking about a run on banks is a doomsday
prediction. The markets, banks etc., are not going to be
blindsided by this, so I think a doomsday scenario is
unlikely. Many people seem to assume that if the interest
isn't paid to bondholders, the bonds will immediately become
worthless. However, they won't be worthless. I think instead
of being worth 100, they will be worth something less, like
98.

Please allow me to digress with a recent personal experience.
Lately, I've been very stressed. My dear husband and I are
attempting to sell our house, buy another one, and move. Two
weeks ago I was at maximum anxiety. I couldn't stop
thinking--what if it doesn't go through on the day we planned?
I broke out and couldn't sleep. Then, the deal didn't go
through on the day we planned. We adjusted. Actually, it
meant that both us could attend my annual family campout,
which was fun. The deal getting delayed wasn't that big of a
deal. The experience made me realize three things:

1. Most of what we fear doesn't happen;
2. When what we fear does happen, we deal with it better than
we anticipated when we were stressing about it;
3. What derails us are the events that we don't
anticipate-when the earthquake and tsunami randomly strike.

Using the system that I work with (called functional asset
allocation), you invest your net worth mindful of protecting
yourself against different things that can go wrong. You also
protect against the "triple whammy" (when 3 things go wrong at
once.) I encourage clients to control the things they can
control (their savings, spending, and net worth allocation)
and let go of the things they can't control (interest rates,
market returns, and politicians.)

That being said, interest rates will probably go up. You
don't have to have a PhD in economics to realize that interest
rates are at historic lows; pretty much all they can do is go
up. So, for instance, if you're planning on buying a car on
credit, that might be one reason (and only one reason) to buy
it now rather than later. However, if you don't need a car,
or one of many other reasons not to act now applies to you,
don't do it.

When trying to sift and winnow through the financial punditry,
remember to follow the incentives. Politicians, writers, and
newscasters know that fear can motivate your reading and
viewing habits. Generating fear generates business. If
writers want to seem relevant, they have an incentive to
generate fear. The politicians and the pundits are benefiting
from this crisis right now. When the incentives change, the
crisis will be resolved.

Want to see a humorous take on this subject? Check out Ken
Robinson's "It Won't Go to Zero." While Ken wrote and
produced this rap about the stock market crash, IMHO, it
applies nicely to the current crisis as well.

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