A Time To Panic

Well it has been yet another exciting and interesting week in the world of finance. Unless you're completely holed up in a cave, you've likely heard something about $700 billion being ask for by President Bush to try and boost the U.S. financial system.

Make no doubt about it, that is a ton of money. The cost of the Iraq war is nearing this amount ($582.45 billion at the time of writing this), or we could send some 23 million American students to public college for free. Wouldn't that be great?!

But let's consider what could happen if our government doesn't act...

If we let capitalism run its course and kill off the companies that made the poor decisions regarding mortgage-backed securities and sub-prime loans, we would say adios to some enormous financial institutions. Forget for a second that we have already seen Bear Stearns, IndyMac and Lehman Brothers fail. Let's look at Fannie Mae, Freddie Mac, AIG, Goldman Sachs and Merrill Lynch.

Freddie and Fannie have both been responsible for a combined $5 trillion in mortgages. That's enough money to pay off over half of our national debt. And yet this year these two companies were essentially taken over by the government because they had made too many bad bets.

AIG recently was granted an $85 billion bailout loan from Uncle Sam to keep it afloat. The company is in the insurance industry...perhaps you've heard of them.

Goldman Sachs is thanking its newest investor (read: savior) Warren Buffet. He invested $5 billion into the company; allowing it a breath of fresh air and a real chance to survive. But let's not forget that Goldman no longer exists as an independent investment firm. The government changed that up, making Goldman a traditional bank now...not really different than Wells Fargo.

Merrill Lynch had to be bought out by Bank of America for it to survive.
If none of that had happened, it's not a far stretch of the imagination to think that we'd be in a second Great Depression.

So back to that $700 billion. What Bush is proposing is that he uses that money to buy the bad assets from these financial institutions. This way, their books are in better shape and in return these institutions will begin lending money out again.
Our nation and our economy rely on these giant financial institutions moving money around and lending it out - allowing for capitalism to function. When banks aren't lending money, people can't buy things like homes and, as we've seen, the whole system goes to hell.

Do I believe that a $700 billion band-aid is going to fix what ails the economy? No. The whole problem stems from lenders granting loans to John and Jane Doe who simply over-extended themselves and were allowed to keep spending. But something needs to be done and perhaps helping out some of these institutions can be a start.

Now would seem like a terrible time to begin investing in the stock market. As I've just said, banks and investment firms have been in a death struggle trying to keep their heads (and financial books) above water. As with many scary times, perhaps it's best to keep your money tucked away under the mattress until the skies clear and things are a bit more certain, right?

I disagree. And the world's greatest investor of all time disagrees. Buffet has said that "it is best to be greedy when others are fearful, and to be fearful when others are greedy." Can you smell the fear in the air?

I've written about the wild ups and downs in the stock markets recently. It can be a stomach-curling experience to watch your hard-earned dollars losing value. But on the other hand, there are a great number of strong, long-lasting companies who have had their value decrease through no fault of their own.

Does anyone really believe that Pfizer (PFE) or Coca-Cola (KO) have anything to do with sub-prime mortgages? And yet Pfizer is down 18.64% on the year and Coke is down almost 18%. Both companies pay a healthy dividend and have for years. Does anyone really think that Pfizer or Coke is going to go out of business anytime soon?

Now this isn't necessarily a recommendation for either company. I personally don't own shares of Pfizer or Coke, but I wish I did. Dividend paying companies are a sure way to keep your portfolio healthy when the sky appears to be falling.

So my final thought.... is this a time for panic? I say emphatically no! Instead, I see a lot of opportunity and value in the market these days. But don't just take my word for it. I suggest heading over to a website like the Motley Fool and read some of their free articles. An hour or two spent on that website always reminds me that a long-term approach to investing is the best and most successful way to go!