Oh No! Abraham Lincoln Has Become George Washington!

Five Reflections on the Financial Crisis
By Jason Hom
Staff Writer

If you want an explanation of the quirky title right away, please skip to 4). Otherwise, keep on reading.

1) In the news, I keep hearing about the radically altered home mortgage market and how all the rules have changed, rendering it extraordinarily difficult to purchase property affordably. For example, several commentators have commented that the FICO (credit) score required to obtain the lowest interest rate has risen sharply. A little bit of perspective is required – what we’re seeing now in the home mortgage market isn’t so much a new draconian lending paradigm but a simple reversion to long-standing historical standards.

The anomaly, of course, was the last several years, when lending standards were so lax that some loans required not only no down payment but also no proof of income. From what I’m told by people looking to buy soon, if you have a good credit score, have 20% saved up for a down payment and have a steady job, you can likely still qualify for a loan and even get a 30 year fixed-rate a couple of points lower than the long-term historical average.

2) That being said, the credit market is undoubtedly in alarming turmoil. LIBOR, short for the London Interbank Offered Rate, measures the interest rate that banks charge to each other. It’s soared, and like a cat that climbs a tall tree and then can’t make its way back down, it’s stubbornly refusing to descend. Even the fire department (read: the Fed and other central banks) can’t seem to help. Banks are demanding a high interest rate from each other because they don’t trust that they‘ll be paid back in this time of collapsing banks; basically, they want a rate of return commensurate to their risk. Bottom Line: Until the banking industry stabilizes and the bank-to-bank lending rate returns to Earth, many things aren’t going to be normal. Please note that 1) and 2) are not contradictory, as a still-functioning home mortgage market and an overall credit market in turmoil are not mutually exclusive.

3) So what’s to become of us? Well, I think we’ll do relatively well in the long-run. Contrarians are actually buying up things right now. Is that the right thing to do? I don’t know, but I do know that everyone – and I mean everyone, even those who are completely hands-off about their investments – has heard the adage “buy low, sell high.” And when directly queried, everyone heartily agrees with it. Yet everyone who was so keen on pouring money into the red-hot market a couple of years ago isn’t touching it now with a ten-foot pole, even now that it’s down 40% from its highs. Go figure. So are we out of the woods once the credit crisis abates?

4) Not quite, I think. In my informal survey of TV news channels the last couple weeks, no one has really mentioned inflation. Bernanke has indeed commented that severely dampened economic growth has lessened the risk of serious inflation, although it still persists. However, the concept of inflation as a looming, ugly threat seems to have disappeared entirely from the public consciousness. Could the unthinkable happen – could a $5 bill, featuring our dear Honest Abe, ever eventually become worth a $1 bill, featuring our revered George Washington, in a matter of months to a couple years? While it’s unlikely that an inflationary crisis of this magnitude could occur, the risk of serious inflation is something that has to be considered – after all, how much longer can we keep printing more money and expecting no long-term consequences? Indeed, inflation is hitting us even know as we speak. Keep inflation in mind when you stash your money in a 3.5% CD or savings account now, as many who are fleeing the stock market are doing. Your real rate of return is negative – doggone it, negative – because inflation is running at around 5% lately. So that FDIC-insured CD you have is safe and good as part of a larger plan (particularly if you’re saving the money to buy a house, pay tuition in a couple of years, etc.), but it’s not going to cut it in the long run if it’s your only plan.

5) Ahhh, so what should we do? Well, there are plenty of good things you can do – spend some time playing with your kids or dog at the park, volunteer at the hospital for a Halloween event, enjoy the fresh air and sunshine along the Embarcadero, tell your parents or kids or nieces or nephews or pets or stuffed animals how much you love them, try learning a new recipe for dinner or marvel at the animal and fauna exhibits at the new Academy of Sciences. If you don’t need the money in the market anytime soon (I do realize that is a big if, and my heart goes out to all those who are planning on retiring soon and are counting on their 401(k)s), trust that the market tends to go up over the long-term (i.e., decades) and don’t unduly worry. Go out instead of watching all those little red arrows on the screen.

Here’s a first-rate idea – come check out the art of your fellow UCSFers! The Tabula Art Show is happening on Wednesday October 29th from 5-7 p.m. in the Millberry Union City Lights room – come check out terrific photos, paintings and glasswork from fellow UCSFers and enjoy FREE sushi and wine!

Jason Hom is a medical student currently taking time off to do research.