Sushi Money

The market is soaring today and seems to like the recent aggressive action by the Federal Reserve, and that they may drop the Fed Funds rate by a full point or more today.  I sensed a change by several commentators that instead of the Fed being behind the credit crisis the past few months, they are actually now way in front leading the charge to solve the financial problems.   Which is good.  Maybe it’s not all doom and gloom.  Although there’s still a lot of disagreement about the Fed’s course of action to solve these problems over the long term.

But Fed Chairman Ben Bernanke is well-versed in Depression era financial lessons, and did a great deal of academic research on the same.  So he has studied the causes and influences of the financial problems of the 1930’s and is working to prevent the same thing from happening now.

Apparently the banking and lending industries have just about shut down over the past weeks as everyone is afraid of  doing business with another company that may go bankrupt.  Some of those fears have eased today after Lehman Brothers (LEH) and Goldman Sachs (GS) both reported earnings that were not quite as bad as many have thought, with higher estimates going forward. 

That’s all the market really wants right now… clarity for the road ahead.  And with today’s Fed rate cut, as well as earnings announcements over the next few weeks, we may have a lot more of it.   Still going to be pretty volatile, but I honestly think we’re starting to put the worst of this behind us.

“What?!” I can hear a lot of folks saying…  because it just doesn’t seem that way right now.  There’s lots of fear and near-panic in some sectors, and with housing still down and oil and commodities through the roof a lot of folks are worried.

But this isn’t the Great Depression.   Unemployment right now is pretty strong, although that doesn’t mean anything if you’ve lost your job recently.  I wish those of you the best if you’re looking for work.  Many folks are rightly concerned about where their money is and if it’s safe.  For money you can’t afford to lose- it should be in FDIC insured bank and money market accounts.

What if you’re worried about your portfolio?  Make no bones about it, I’m a long term investor with a 10+ year horizon investing for retirement.   The LA Times has a good Q&A article that tells Investors to Take Deep Breath Amid the Storm.I just think it’s not that bad, and it’s not going to get much worse. It’s like the negative press and commentary has reached a crescendo, and just when everybody finally “buys in” to the storyline about how bad it is, the market’s going to turn. 

Somewhere there’s going to be a guy on a street corner with a sign… ‘THE WORLD’S GOING TO END!” and he’ll be standing there by himself looking around wondering where everybody went.   Back to work my friend, trying to make their lives better.

Some pros even see the markets headed higher by the end of 2008.   That’s the camp I’m sitting in.  I remember the recession of ‘90-’91 timeframe.  Many politicians and folks running for election cried that it was the worst economy in 50 years.  And then it picked right up again the following year, leading to a huge run of growth through the 1990’s.  Is it different this time? I doubt it.

We’re in an election year right?  One side is going to gnash their teeth and cry about every aspect of the economy. Lately they have good reason to unfortunately.  I sure wish some of these folks would talk about what’s good in the nation and the economy once in a while, instead of everything wrong with it.  You don’t lead by shrill complaint… you lead through inspiration.  Probably why Sen. Obama attracts a lot of folks?   But one of these days the markets will turn around with conviction (today?) when the news is not quite as bad as before.   Smart money is even buying strategically right now.

“But what about the dollar?” I hear others say.  Well, let’s just say there’s a few companies here at home that really benefit from a low dollar.  But it’s too low right now, and is part of the problem with higher oil prices.  Overall however, the dollar’s going to rebound over time- just watch and see.  I wouldn’t bet against Uncle Sam any time soon.  All the press about this or that country shunning dollars. Hogwash.  Wait until the least crisis in their own country or region- guess where the money will flock to?   Right back here…  and we’ll step up to the plate and do what we’ve always done.  We’ll help them get through it too.

Well it seems I’m too much of an optimist lately, especially in light of the near panic we’re seeing on Wall Street, and how Bear Stearns is struggling to avoid a “run-on-the-bank”. After denying rumors all week about potential liquidity problems, Bear Stearns had to cry uncle and ask for help. Part of the problem is that after many rumors of insolvency and a rapidly declining stock price, they indeed faced liquidity problems after customers wanted their money back in droves.

It’s hard to understand how Wall Street traders and execs who make millions of dollars in salary and bonuses can lose so much money over time and the Fed bails them out? Yes, there’s lots of money involved and the Fed doesn’t want this to spread. But can they save everyone? Do all the banks and institutions that put themselves in this situation deserve a taxpayer bailout?

The government is going to spend billions to bail out these institutions, but Mr. John or Mrs. Sally Q. Public has to face a myriad of economic challenges without any help at all? Oh… wait, we’re having our bailout. It’s called the Tax Rebate.

I’m a fairly conservative guy with strong beliefs in free market capitalism. Yet it sure doesn’t seem like it’s working when the government’s bailing out the institutional folks who developed risky derivative financial products that have now blown up in their faces. But Bear Stearns is Too Big to Fail? Maybe so.

What happens if it’s just not enough? Who bails out the U.S. government? As the U.S. dollar continues to lose value, we simply can’t buy the same amout of “stuff” with it of course. It’s getting pretty tough on consumers out there.

I reached a “pain-at-the-pump” first today spending $49.00 filling up half of my car’s gas tank. If it ever costs me $100 to fill the tank, and we’re pretty close right now, I’m going to park the dang thing. At least more often. But fuel prices continue to rise and grocery, aka commodity, prices will rise further as well it appears.

When you have mass casualties, the rule of the day is triage. Save who can be saved, and say a prayer for the rest. Let’s hope we’re not there yet. But at some point the Fed’s going to have to conduct triage. Are they simply delaying the inevitable? I’m still hoping U.S. consumers can be saved. All this and the majority in Congress want to raise taxes? Now that’ll go over well.

But I’m still an optimist… I think the government does have a plan. The dollar will be supported, the credit crunch will fade over time, housing will bottom and rebound, prices will stabilize, the Bush tax cuts will be extended, inflation will remain low and markets will rally. That’s the rumor anyway.

The last few months can really make investing seem like a losing proposition. While reading the message boards for a particular stock today I saw that one gent asked for honest advice about selling versus hanging in there on a stock that was dropping day after day. He was down over 50% in the last two months. The reply:

“Well, look at it this way. One insider alone owns 20 million shares and isn’t selling! He has seen his portfolio drop close to 1.5 billion in the last 3 months. If someone tells you they would give you 50 cents on the dollar for your home would you give it to him? The only difference is that you get to see a quote on your stock. Sit back and be an investor…”

Interesting analogy, and it may be very good advice. Or it may not. Personally, my home isn’t an investment, and I don’t “live in my stocks” (even if it feels like it sometimes). What really matters is the context of that “investor’s” life and investing situation. All things being equal, if he doesn’t need the money in the next 5-10 years, and he’s chosen a solid, profitable company that’s just out of favor right now, and he’s okay with sitting on it for the long term, then yes- maybe he should stop checking his stock quotes every day and just ride out this downturn.

But maybe he “invested” money that he really needs over the short term. Maybe he’s so worried because he has been making short-term bets with money he doesn’t have. Maybe he really shouldn’t be investing in growth stocks without professional advice because he simply doesn’t have enough knowledge. Maybe his risk tolerance just isn’t suited for investing in stocks at this point and he worries too much to sleep well at night. Maybe, maybe, maybe…

You’ve got to decide where you stand. And for how long. Sometimes selling is the only thing that brings your sanity back. Even if it is the wrong decision. But sometimes you’ve got to say “What the hell…” and just leave things be for a year or two.

Most of the time I try to “sit back and be an investor.” Sometimes it’s pretty damn hard to do.

    It strikes me that much of the market turmoil in recent weeks is based on fear… and maybe for reasons that have nothing to do with 99% of the investing and working public.  In large measure, so much of the credit, lending and hedge fund crises have been created, expanded and literally blown-up by the banks and investing institutions who designed and packaged their gourmet derivative specialties.  Yesterday we heard rumors of more hedge fund problems and that affected the financial markets as Wall Street finished a difficult week. This coming a couple days after rogue French trader “Mr. Average” causes billions in losses for one of France’s largest banks…. which may also have caused or exacerbated the European market turmoil last week.  How the heck does that happen anyway?!!!  

     Among all the stock market and investing challenges we have faced lately, I started thinking about The Recession.  The big scary word that everyone has been batting back and forth the past few months.  On an individual basis, do we really need to worry about a recession?  For many the answer might be… it depends.   It depends on if your job and income is something that may be affected by the recession of course. 

    There are many arguments for if or why we may be in a recession, and why the financial markets have been so volatile.  Housing, improper lending practices and wholesale repackaging of lousy loans has brought on a crisis of confidence throughout the financial services industry.  Many consumers are mystified by the degree of angst and financial losses that have occured to the largest of financial and investment institutions around the world.  Perhaps not since the savings and loan crisis of the 1980’s have we seen this degree of financial loss, confusion, negligence, fear, public reaction, and pending government legislation.  But this crisis is still unfolding… what the Financial Times calls The start of the great unwinding:

“If the US suffers a recession in 2008 or 2009 it will not be due to an industrial decline or an oil price shock. It will be a recession that began in the financial system. The response of the general public is confusion, tinged with horror, at how intangible finance can impinge on their daily lives. Even some bankers and traders must be struck by the chaos their business can unleash, and feel awe at just how powerful they have become.” 

      It is staggering to consider the losses that have occurred in the financial services industries.  And staggering to consider the ramifications for how it affects the consumer, consumer spending, and a slowdown in business nationally.  We may indeed be facing a long recession with difficult times ahead.  And the way out may hinge on the ability of the consumer to continue to spend.  But many people have jobs that are fairly well protected, or entrenched perhaps.  Government and civil service workers don’t need to worry about the recession per se because they normally won’t lose their jobs.  Workers such as teachers and professors with tenure don’t normally have to worry about their jobs either.  Highly skilled workers such as doctors, lawyers and other professional workers proably have less to worry about as well- and in some cases may do more business in difficult economic times.   Some service industries actually do better during recessions:

“Most of the service division’s 16 major industry groups decelerate in job growth or lose jobs during recessions. Five major groups are at least slightly countercyclical, however, gaining jobs faster in recessions than in normal times.”

 

Source: Bureau of Labor Statistics, Monthly Labor Review; Updated 2006

     So that shows that even during a recession there is opportunity.  But admittedly there are many workers with jobs that depend on the economic appetite of others, such as factory workers, sales personnel, mortgage and loan workers, etc, etc.  If you don’t have much education or skills, and you live in an economically depressed area… then the recession is something you feel first-hand.  But is it a national recession, or a global recession?   Are there really no jobs, or much fewer jobs?  Depending on the region you live in, maybe so.  But I know in the metro area that I live there are many, many jobs.  Maybe they’re not the same jobs that people either want or had before however, but there are jobs.  Service jobs are available everywhere of course.  We’ve written about the service economy before, and where the jobs of the future will be.

     News and information now travels in seconds and minutes compared to days, weeks and months over prior decades.  We hear every tidbit of news and quotable thoughts by leading economists throughout the world.  We analyze data much more quickly, and the markets react by the minute to news…. the world really is much smaller, and as Edward M. Gomez from SFGate.com writes yesterday, the impacts of a recession in the U.S. are far reaching.

“The news coming out of the World Economic Forum, which has gotten under way in Davos, Switzerland, is not good. At the international gathering of leading economists, high-level government policy-makers and captains of industry, the collective prediction is that a “full-blown, prolonged recession in [the United States] is now inescapable, with the rest of the world set to be dragged into a severe global slowdown despite [this week’s] emergency U.S. interest-rate cut by the Federal Reserve….” (Times, U.K.) ”

     Those are pretty tough words- read the rest of Mr. Gomez’s thoughts and it’s downright scary.  Yet I think it’s important not to give into the fear and rhetoric that’s plastered across the headlines every day.  We can even read a list of 10 Reasons a Recession is Coming.   Uh… okay.

     But what does it mean to us?  Probably only something that each of us can answer.  At some point, in order to understand it, I need to make the economy more personal.  Rather than worry about it, or not understand it, I think we need to assess how it may affect us at home (and within our communities) and whether or not The Recession may really challenge our individual ability to have an income and support ourselves.  If the answer is “yes” then I think it’s time to take steps to protect ourselves.  I’m not talking about survivalist measures from a total doom and gloom perspective… or about panderers who would take advantage of consumer fear (Caution: That site is designed to take your money while providing common sense solutions that you already know!).  But in the same way that emergency fund of savings can help us bridge difficult financial times, I think there are practical measures we can take to improve our lives while the economy regains traction over the course of the business cycle.  Because it is a business cycle, and eventually the economic slowdown will turn around while productivity increases.  This time it may take longer, or it may not… we just don’t know yet. 

   But what practical measures can we take if we are really worried about The Recession?  I think there’s a lot we can do.  Simple things like cutting back on spending, increasing savings, and reducing the use of debt.  Maybe start carpooling or becoming more efficient with transportation, eating healthier and exercising more to stay healthy (and reducing medical bills now and in the future!).   And even becoming more sustainable at home through growing a garden, reducing utility costs, etc.  Those are all simple, yet important things we can do in our own lives that will make a difference.  More importantly, we can develop our own human capital through gaining education, skills and experience in certain areas can provide an emergency skillset or knowledge-base that allows us to transition more quickly and efficiently to a new job or career if necessary.   Job retraining has become a hot-button issue for politicians and economists lately, and rightly so.  I strongly believe we must support current and future workers because education and job retraining initiatives will provide strength to our nation from an economic and human capital perspective over the long-term.  If our nation is to remain strong economically from a global perspective, then we must make sure to support our workers’ education and training development.

    We can also focus on those service industries that actually do well during a recession as shown above.  Can you say healthcare?!   Maybe we need to stay in a career or industry longer than we want because it is a practical, secure solution for the time being.  And remember The Grapes of Wrath?  A story of social and economic desperation with a major theme involving the mass movement of people from one region in the U.S. to another simply because there was little work, income, or even food to support them.  A stark illustration perhaps, but I don’t think it’s out of the ordinary to consider moving from one geograhpic region to another if a downturn in employment and opportunity will really affect quality of life and income needs.  I have a succinct opinion on the matter:

If it takes change to make our lives better, then we better change!

   I think back some years ago to a time in the early 1980’s.  I was finishing college and totally engrossed in school and personal activities.  College has always been a time for being totally engrossed in yourself and those pursuits you find most- well, interesting at the time… certainly a time of self-indulgence as well as growth.  But in the late 1970’s and early 1980’s the U.S. economy was in really, really bad shape.  The worst unemployment since the Great Depression, and crazy high inflation (over 12%!) that had spiraled out of control. Many Americans had lost confidence in themselves and the government.  It’s no wonder Ronald Reagan was elected President in a landslide vote with his optimism and strength.  Here’s a look at the long-term U.S. unemployment rate from 1958 through 2008:

Source: Burea of Labor Statistics, 2008

    But during that timeframe, honestly I was pretty clueless to the economic challenges the nation faced as a whole during those years.  Recession?  It really didn’t mean much to me.  I was a young college student with stars in my eyes.  Unemployment?  I didn’t really think about it… I found jobs waiting tables, being a lifeguard, working as an usher at sporting events, working in a chicken processing plant cleaning up chicken parts, and even working hard to get a scholarship.  Yes, I was a college student and didn’t have to worry about feeding a family and paying off much debt at the time.  But I think millions of other people do the same thing each day by scrambling to find work and opportunity.  Remember the recession of 1990-1991?  I don’t remember much about it.  I was working in a secure job and focused on getting things done.  I remember there was a housing downturn, and some challenges nationally, but we worked through it.  The booming 1990’s left those memories in the dust. 

Here’s another view of the long term unemployment rate (as a percent of the civilian labor force) compared to past recessions from 1970 to 2005.  It does show how unemployment usually increases before and during and even after recessions.  But often we don’t even know we’re in a recession until months afterwards.  If we’re in a recession today, we probably won’t even know until at least June, after two consecutive quarters of a decline of real GDP… here’s how the NBER dates a recession, with a lot of other info.

Source: BLS Issues in Labor Statistics, January 2006 (.pdf file)

     So back to our original question… does it really matter if we are in a recession?  I would really ask, “Does someone out of a job really care what you call it?“  I think the answer is self-evident.  People lose jobs, are out of jobs, are looking for jobs and are hired for jobs whether there’s a recession going on or not.  It happens all the time.  Politically and economically recessions matter because the nation’s economic engine slows down and it can have long-lasting effects nationally and globally.  There are real consequences to depressed economies and loss of the ability to pay for goods and services.   So yes, it potentially means people are going to be affected in greater ways by fewer opportunities to work, and business will be challenged to expand.  But on an individual level I submit that what you call it really doesn’t matter.  What matters is what we are doing individually and collectively to improve opportunity and economic well-being for ourselves and our families.   I think the government is moving in the right direction, and a family of five may even see a sizable amount of tax rebate in a few months.  Our national attention is focused on doing more, and improving the economy. Writers and financial sites continue to answer questions that matter to consumers.

     All things being equal, I think it is better to stay informed than not be informed about national and world events.  For that reason it’s important to pay attention to the leading themes we face.  Certainly you can make and lose money by the influences that shape our economy, and being better informed can help one make better decisions… hence, staying prepared or even finding a better job.  But I think our being informed should be framed in the context of the challenges that really can affect us.  I spoke of it the other day- there are a lot of problems we all have that we should pay a lot more attention to, and that we can do something about.

Petrarch once said, “Where you are is of no moment… only what you are doing there.”  That’s a tough statement for the homeless guy living in the street to swallow.  But I think it speaks to an eternal truth that what we are doing with our lives at any given moment in time really does matter.  We can influence and direct our future, we can improve opportunity, we can help others who need assistance, and we can find a job whether or not we are in a recession.

       Trying to balance the perspective of the words you read each day with what is really important in your life can be a challenge.  For example, just thinking about the 5.4 million people that have died in Africa over the past decade is staggering.  And over the past year there’s been a developing  crisis in Kenya where thousands more people face starvation and I can do little about that as well.  Bill Gates can however, and is pouring millions of dollars into helping small farmers in Africa.

“If we are serious about ending extreme hunger and poverty around the world, we must be serious about transforming agriculture for small farmers — most of whom are women,” he said in a statement. The Bill & Melinda Gates Foundation on Friday unveiled a package of new grants worth more than $300 million, nearly doubling its spending on agriculture.

 There has always been strife and suffering throughout the world.  Usually we tune it out, right or wrong it’s hard to have an impact.  But we can have some impact, and make choices about where some of our money or time goes.  Places like Kiva and MicroPlace are providing wonderful opportunities to have a real economic impact on people’s lives in other nations.  Reading about the life challenges that people face each day around the world certainly provides context to the “challenge” that some of us face here at home.  And when I read the big, scary RECESSION headlines, it helps me to frame that context in a healthier manner, and think about what I can do in my local community.

    In large measure that is why I try to strike a chord of optimism in difficult times, and perhaps why the tenor of my writing is usually more hopeful.  I don’t ever mean to belittle or dismiss the challenges that so many people do face each day.  I know those challenges are real.  And I am thankful for what my family has personally in terms of a steady income. We’re not wealthy by any means, and the effects of economic challenges are very real here at home as well.  We’ve modified our spending based on fuel and grocery costs as well as trimmed back in other areas and increased savings where possible. We are fortunate to have decent income and be able to support our family.  And yet I think it’s vitally important to remember the strength we can find within no matter what our situation, and that we can find and create opportunity in both the present and future through setting goals, intentions, gaining education and continuing a daily effort to grow.

     And besides, when a cafe in San Francisco spends $20,000 on a machine to brew a cup of coffee, how bad can it be out there?  Well, never underestimate the passions of a coffee aficianado, recession or no recession.  Personally I prefer Bill Gates’ approach to helping African coffee farmers.  Instead of spending $4 or $5 bucks on my own cup of coffee, maybe I can find a cheaper cup and have some left over for savings or a good cause.   Those are things I can do something about.   I think we’ll be okay, and there are a lot of things we can do to ease the challenges we may face ahead. Take care of yourself! 

If you like this post, please consider subscribing to Sushi Money in a feedreader.

Or you can subscribe by entering your email address below. Thanks for visiting!

  It’s hard to pay attention to a stock market that opens several hundred points down and keeps plunging, only to recover most of the drop on breaking news of a 3/4 point Fed Funds Rate cut.  But it does get one’s attention.  If you’re not out of the stock market right now it’s a little late to start.  I’m still riding the tumultuous volatility, and holding on with a firm look toward the distant horizon.  One that I won’t reach for 10-15 years or more.  Besides, this is a pretty darn good time to invest for the long-term.  The average P/E ratio for the S&P 500 is right around the historical average of 15.  That’s pretty fair valuation for a long-term investor.  Doesn’t mean there won’t be tough times ahead though- we face a lot of other challenges that a Fed Fund’s Rate cut may have little impact upon.

But lately the market reminds me of the Big Bad Wolf.  If you haven’t seen the 1933 Walt Disney short cartoon of the Three Little Pigs, it’s definitely worth it.  This 9 minute cartoon captured the nation’s attention during the Great Depression.   It’s a wonderful cartoon and musical combination that perhaps found resonance among the nation for the simple morals that hard work and planning ahead can protect you in the face of adversity. 

That’s something to consider as we save and invest.  The stock market’s recent volatility shows us that asset allocation and diversification provide a measure of strength over time.  When the market loses hundreds of points in a day however, it’s hard to find any shelter in the storm.  Yet these are, after all, moments in time.  Moments that can wreak havoc on a portfolio, no question. But for those who have time, hold on and keep investing steadily, these events will simply be a footnote. 

Am I afraid of the Big Bad Wolf?  Not in the form of the stock market.  Right now I feel like I’m missing out actually… I’d love to have a little more funds to invest.  And honestly- there’s little I can do about it anyway, so I try not to let it get to me.  I don’t mean to minimize the financial losses and stress that anyone faces, especially for those close to retirement.  But I think there are a lot of other “wolves” out there to be afraid of that I can actually do something about- namely building up an emergency fund of cash, my health, our family well-being and what goes on around us each day.   And as for saving and investing for retirement?  I think with committment and disciplined patience, we can slowly build a growing, diversified portfolio in the form of dividend paying stocks, bonds, mutual funds and tax-advantaged accounts.  And maybe that ‘ole stock market wolf won’t bother us as much.   He’ll be back to be sure, but like “Practical Pig” I’m building a strong financial house. 

Realistically, it’s hard to say how long or how severe the economic challenges we face will take to turn around. All the people that are supposed to be doing something are working on measures that can point us in a stronger direction.  As  many economists have noted, the Fed’s action today is “not an instant fix.”  But it’s a start, and they’ll probably lower rates again next week.  I’m curious to see what the President and Congress put together for a stimulus.  Whatever it is, they need to get it done. 

You know that line… “Opinions are like a$$holes, everybody has one!” That’s about the sentiment for a U.S. recession next year. The “will we or won’t we” debate is reaching a peak… except of course for those who have already decided (Bill Gross of Pimco) that the U.S. is in a recession right now. That’s not too far out for a call on the economy, because recessions can be very hard to figure out until the economy is already coming out the other side of the business cycle. Often, the real beginning of a recession is only determined years after the fact. So maybe Mr. Gross is right. A lot of other folks have entered the debate on both sides:

• NO: Abby Joseph Cohen from Goldman Sachs says a recession in 2008 is not likely.
• YES and NO: A December Reuters/Zogby poll says 43% of likely U.S. voters expect a recession in 2008.
• MAYBE: Alan Greenspan recently modified his view of a recession from less than 50% to right at 50%.
• NO: Diana Furchtgott-Roth, former Chief Economist at the U.S. Department of Labor thinks a recession not likely.
• YES:ABN AMRO Bank believes the U.S. is entering a “viscious spiral” with a 75% chance of “plunging into a recession.”
• MAYBE: State Street Bank is not on the record, but believes it “remarkable” if the U.S. avoids a recession in 2008.
• HELL YES!: Jim Rogers isn’t satisfied just to say the U.S. is in a recession… he even thinks the Administration is lying!

Who knows… will we enter a recession? If we do, I think it has a lot to do with psychology and the media. All this talk and blather… of which I too am contributing, ultimately influences the perceptions of a lot people. Personally, I’m not convinced… I think the economy will manage to trudge along while contining to slow, but that a combination of productivity, consumer spending and global trade influences will keep us going. If something extrinsic to the U.S. economy happens- such as an economic crash in Asia, then all bets are off. But with the Presidential election taking shape in full force in 2008, the economic noise will get a lot louder for a while. Heck, I’ll bet all the political wrangling may even contribute something to overall GDP!

     As the “credit crunch” continues, and lenders re-evaluate just how they will lend money, and to whom… I’ve realized that my mailbox has received a temporary reprieve.  In what way?  Well those dozens of credit card offers I normally receive have miraculously stopped!  We normally get so much junk mail that I haven’t really looked at what was coming in until recently.   The end of the year fills the mailbox with requests for charitable donations and other needs, but as I was looking at my desktop pile of junk, I realized I haven’t seen a new credit card offer in at least 2-3 weeks!  Wow!

    I certainly don’t miss the credit card offers… and maybe the lenders are even going to save quite a bit of money from slowing the incessant flow of offers to consumers.  I’m sure they’ll resume at some point, but for now it’s nice to have a few less envelopes in the mailbox.   Why have the offers slowed?  Can’t be sure, but I suspect it has to do with the lenders re-evaluating business practices, and how they target and evaluate credit risk.   It’s not only the lenders re-evaluating credit risk these days.  Fair Isaac Corporation is introducing a new FICO scoring model to more accurately evaluate consumers’ risk profiles.  The Wall Street Journal Online published a review of this process in Default Lines: The New Math of Credit Scores.

  “The rollout of the new credit-scoring system comes at a time when lenders say they are eager for more-accurate measures of credit risk, in part because of rising loan defaults as subprime mortgages go bad and housing prices fall. And there are signs that delinquencies are creeping into other types of consumer debt, including auto loans, further prompting lenders to tighten up on credit.”

   I was reading a comment (somewhere?) about financial companies such as Washington Mutual who are struggling with consumer defaults and bad loans, and it was described how their business practices may have attracted greater risk by targeting a greater share of the market through consumers that were not “served” by other institutions… implying that these consumers were a poor credit risk in the first place, and now are defaulting on loans.  Lots of parallels throughout society there, and I suspect credit card offers via mail may generate the same risk if not carefully screened and evaluated.
   

It will be interesting to see how the new FICO process really works out for consumers.  Of course as the article cites, a new FICO scoring process is not going to change our overall credit history… the “record” of our use of credit. It’s just going to evaluate that history in a new way.  And it’s not going to make sure our credit history is accurate either… I don’t like surprises when I decide to apply for a loan, or to find out I’m the victim of identity theft because some schmuck has been using my credit history illegally!   So for peace of mind and financial well-being, I think it’s important that we take responsibility for our own credit history by conducting an annual review.