You are viewing this article in the AnnArbor.com archives. For the latest breaking news and updates in Ann Arbor and the surrounding area, see MLive.com/ann-arbor
Posted on Sun, May 30, 2010 : 5:53 a.m.

Financial 'crises' unlikely to impact us directly

By david mielke

"What, me worry?"

Remember this phrase made famous by Alfred E. Neuman from Mad Magazine?

What connection does this phrase have with today’s turbulent financial markets, especially when you read headlines such as:

• “Crisis in Greece spreads in Europe.” “Europe provides $1 trillion bailout.”

• “Dow plunges almost 1,000 points.” “Investigation starts to determine why.”

• “Goldman Sachs sued by the SEC. U.S. probes Morgan Stanley.”

• “Fannie Mae and Freddie Mac request billions more in bailout funds.”

The connection is whether we should be worried. What are the direct consequences? How do these events affect our day-to-day lives? The answer, in most cases, is they will not affect us directly.

Greece accounts for only 12 percent of the total Euro zone GDP. It is not a major financial or manufacturing center. As a result, the problems there are unlikely to impact us. There is some worry if the crisis spreads to other countries, such as Spain, Portugal, Ireland or Italy, but only from the standpoint of slowing European growth and demand for U.S. products.

The more direct impact will be if you plan to travel to Europe. The exchange rate for Euros is much lower and your travel costs there will be lower.

Any investor in the stock market has to be prepared for increased volatility in stock prices. With all of the uncertainty in world markets, people are nervous and any news, good or bad, will be accentuated in stock price changes. If you are investing for the long term, continuing to invest on a regular basis, preferably every month, it is most likely you will experience growth in your investments over time. However, if you are drawing down on your portfolio in the near term, or are worried about the markets, it is time to invest more in bonds — U.S. government bonds being the safest.

Whether Goldman Sachs or Morgan Stanley will be indicted will not impact you, unless of course you own their stock. Have confidence that the current investigations will uncover any wrongdoing and appropriate sanctions will be imposed.

Derivatives are “bets” between two parties on the future price of a good. They are typically used to manage the risk of price changes. Derivatives are used for everything from oil to mortgages to agricultural commodities such as corn and wheat. For example, airlines use derivatives to lock in the price of fuel prices in the future. Farmers may use derivatives to guarantee prices for their anticipated crops at harvest time. In general, hedging to lock in fuel prices or corn prices will not impact us. However, if the derivatives are bought and sold by speculators as “investments” we do have the potential for price changes that do affect us. When oil prices soared to more than $140 a barrel a short time ago, it was not because of a shortage of crude, but due to “speculators.” Regulation of these markets, if done right, will be helpful.

We need an overhaul of the financial markets. The question is what to do? Regulations for mortgages and credit cards will impact us all and can be beneficial. New restrictions on banks may potentially accentuate the already tight credit markets.

There is a major concern our local companies cannot get the credit they need to expand or even maintain their current operations. This has a direct effect on our economy and the job market. The bigger worry is the rush to get something done. We cannot afford bad policy at a time when financial markets are already fragile.

Fannie Mae and Freddie Mac are mortgage financing giants, the world’s largest investors in mortgage loans. They were created by Congress to reduce the cost of home ownership.

The current mortgage crisis and collapse of the housing market can at least, in part, be credited to these two quasi-government entities. The government has already provided $137.5 billion to bail them out and, within the last week, they have returned to ask for $15 billion more. Late last year, the administration committed to cover all losses by the two companies through 2012 — no limit! This replaced an earlier promise to cover losses up to $400 billion. This is indeed worrisome and, more so, because the current legislation to regulate the financial markets does not include Fannie and Freddie.

These headlines alert us to uncertainties in the financial markets and are serious issues that will be sorted out and addressed. Think about each concern separately and don’t become overwhelmed by what appears to be overwhelming.

Step back and consider saying, “What, me worry?”

David Mielke is dean of Eastern Michigan University’s College of Business and a leader of SPARK East, a startup business incubator in downtown Ypsilanti. He can be reached at dmielke@emich.edu.

Comments

Basic Bob

Mon, May 31, 2010 : 8:14 a.m.

Great news that I won't be directly affected by these situations. The indirect effects are already killing me. The worldwide credit crisis has caused major disruptions in my business and my personal credit costs to increase dramatically. Pardon my skepticism, but I'm sure university employees will remain unscathed even as the bad news continues.