Economic crisis of 2008: Return to basics of sound money management during period of financial turmoil

January 1, 2009

"The silver lining of the financial crisis of 2008, could be a united shift back to sound financial management, forcing business owners and consumers to make important financial decisions. "

Keypoints:

With so much punishment to absorb, it may seem like a stretch to suggest that there is a silver lining in that dreadful economic cloud, but I believe there is.

There is little doubt now that the root cause of our trouble can be traced to the greediness and, in some cases, possibly illegal actions of many of the major players in the money game.

Add to that the willingness of corporate board members to grant obscene salaries and bonuses to CEOs despite reckless and incompetent management, leading to huge losses and even complete financial collapse of the companies under their stewardship. And don't forget the gullible consumers who depended on soaring home values and an endless line of credit to finance reckless spending beyond their means.

These and other economic sins combined to give birth to the financial crisis of 2008. They also brought the world's governments together in unprecedented cooperation to win the battle against the fear that fueled panic selling on the stock market.

This consortium has the power to do whatever is necessary to restore stability to the world economy. It can buy up toxic debt, nationalize firms, renegotiate mortgages, suspend stock market trading - even call bank holidays, if necessary.

Out of the quicksand

There is no doubt in my mind that the efforts of world governments will lead us out of the quicksand that has swallowed up so much of our national wealth and self-confidence.

The first steps on that road, I believe, have already been taken. And soon it will be time for that silver lining to peek out from behind the cloud that has been hiding it from view.

In short, I believe our current troubles will turn out to be a blessing in disguise; I believe they will force Americans to face up to - and put an end to - the self-destructive behavior that laid the groundwork for the economic mess that we're living in today.

An entire generation has had to learn the hard way that the bill always comes and, one way or the other, the bill must be paid. While the fiscally conservative nature of those of us who lived through the Great Depression may have seemed quaint to some of the younger folks, it's likely that the current troubles will bring about a more realistic look at the world of personal finance.

Of course, individual consumers aren't the only villains in this melodrama. Government and corporate officials have taken irresponsible borrowing and leverage to unprecedented heights. In 1990, the national debt stood at a scary $3 trillion. A few years later, it was double that. Today, it stands at more than $10 trillion - figures so large that the human mind cannot comprehend them.

Meanwhile, our major financial institutions have taken mismanagement of their fiscal houses to astonishing levels. Relying on the absurd belief that home prices would continue to soar indefinitely, they granted, packaged and sold home mortgages that would ultimately prove all but worthless, thus generating the so-called sub-prime mortgage cave-in that proved to be the catalyst for our near economic collapse.

So where is the silver lining in this frightful cloud? I believe that the shock wave burrowing its way through every level of our society will result in a major move back to the basics of sound financial management. Government will ditch incentives that encourage destructive spending, and new credit card regulations and safeguards will help to keep credit card debt to manageable limits.

I think we're going to see criminal charges placed against some financial executives, which, in turn, will prompt a thorough housecleaning in our major financial institutions.

On the long and winding road back to economic health, business owners and consumers will be called on to make important financial decisions. During the journey, this column will continue to stress the kind of financial basics that will help you to emerge in better fiscal health than ever.

Mr. Lynott is a former management consultant and corporate executive who writes about business and financial topics for various consumer and trade publications. His latest book, Money: How to Make the Most of What You've Got, is available through most bookstores. Reach him at lynott@verizon.net
or through his Web site: http://www.blynott.com/.