Black Monday Averted, For Now

The term Black Monday refers to a Monday during the Wall Street Crash of 1929. As we all learned in high school, this Crash ushered in the Great Depression during which food was scarce and jobs scarcer, crime flourished and investors sky-dived off high rises. I distinctly remember the picture by Dorothea Lange in which a mother stares hopelessly into the distance with a young boy on either side of her, their faces buried into her shoulders.

By Ccandysuzie

So when on Monday, March 17th, as I drove up to visit my dad I heard the NPR Marketplace analyst use the term Black Monday and Great Depression to describe the worries surrounding the current downward spin of the Stock Market of which the Bear Sterns crisis was simply the latest manifestation, my heart skipped a beat.

I’m about to head off to grad school this fall, I thought…my whole life is ahead of me…and suddenly my mind inserted my face into the Dorothea Lange photo desolation, destruction, depression…the end.

Okay yeah…so I’m a bit dramatic (very dramatic), but chances are you shared at least a bit of the panic I felt last Monday. The truth is, however, that the economy is far from the state of the 1929 crash but it is important to know what’s going on and how you should react in order to protect yourself.

The Economist’s lead article this week is a great analysis of the situation. They trace the current collapse back to the dotcom bubble burst in 2001. While overall the American GDP (Gross Domestic Product—the number economists use to calculate a country’s economic trajectory) has weakened, financial services have continued. Meaning that even as the economy slowed down (you and I see this most through the growing scarcity of jobs) claims on future clash flows continued (loans, credit card debit, etc.).

One major example of this is the housing crisis caused by bad mortgages. You may have heard of the term “subprime mortgage” linked to the recent downturn. A subprime mortgage means that the mortgage rate is adjustable. Often the initial mortgage rate is low but increases over time. They are given to buyers who don’t qualify for market interest rates due to their credit history or lack of constant income.

During the past few years, housing prices have doubled and tripled, leading many of these buyers to believe that they could refinance their house in the future if they even found themselves unable to pay their mortgage bill. Suddenly, last summer, all of the real rates for the subprime mortgages kicked in and across the country home owners defaulted on their payments. This sparked a domino effect that, as this past week demonstrated, is affecting all levels of the US economy.

Bear Sterns, one of the big Wall Street companies, underwrote much of the mortgage market within the US. On Monday, JP Morgan Chase bought the company and their credit obligations for only $2 a share less than one tenth of the previous weeks’ market price.

As my previous two articles on the Recession discussed, economic slowdowns affect everyone. Across the country, for example, the price of food is increasing. Reuters quotes Bob Goldin, executive vice president of food research firm Technomic Inc, saying that the food industry is facing a “perfect storm” right now in that lowered consumer demand is coinciding with a rise in the cost of doing business.

Best advice?

1.) Don’t Panic

2.) Diversify your employment—try to get some source of independent income

3.) Save, Save, SAVE! Even if it’s only a few dollars a week.

4.) Avoid using your credit cards as much as possible and carefully examine your student loan terms to make sure you can handle the payments.

[Have any more economic questions for Suzie? Ask 'em here!]