Two months ago at a reception hosted personally by Chuck Schwab, I met Hank Paulson, the former Secretary of the Treasury under George W. Bush. Hank was on the job from July 2006 to January 2009 during the worst financial crisis since the Great Depression of the 1930’s. I was impressed with Hank because he is not an ideologue. Politically, he is a Republican, but his overall philosophy and attitude is open-minded and pragmatic. His wife Wendy was also at the reception, and she was a big supporter of Hilary Clinton.
Hank was in San Francisco at the invitation of Chuck Schwab to talk about the financial crisis and his book ON THE BRINK Inside the Race to Stop the Collapse of the Global Financial System, which I enjoyed reading after meeting him and hearing him speak. After 400-plus pages of a well-written, blow by blow, history of the financial failures in 2007 and 2008, Secretary Paulson’s conclusions about what he learned that could prevent a repeat of the crisis are simple and pragmatic:
Americans save too little and consume too much, and this forces massive borrowing from foreign nations.
U.S. financial institutions had way too little liquidity and too much dependence on unreliable short-term funding.
There are other conclusions at the end of his book, but these two are relevant to this article. Personally, I think we (Americans) started down the wrong path when we started thinking about our houses as investments rather than homes. The home where my wife, Bonnie, and I live is our retreat, a source of peace and harmony that balances our heavy workloads and worldly experiences with our private and personal well-being. Our home is a gathering place for our family and friends and sometimes a venue for events related to the causes we care about in our community. Really, do we care so much about the market value of our home in 2010? Our home is not our retirement plan; our home is where we want to live and, eventually, where we want to die. We would not sell our home if we owed more than it was worth in the market today. Our home is not a commodity; it is our heart.
I am puzzled by the widespread notion that if the market value of your home is less than the mortgage then you should dump it back on the bank. I coach my clients to think much more personally about their homes. The financial dimension needs to be appropriate, but the appropriate financial dimension is deeply subordinate to the personal meaning of your home.
The old ways were better because they were based on criteria and standards, such as income, stability, trust, and 20% down. The old ways were better because the people and institutions that originated the loans owned and serviced them. There was a direct consequence to the originator if the loan went bad. The massive securitization and sale of debt to worldwide entities has destroyed accountability, and the U.S. is vulnerable because our appetite for debt and our capacity to cope with it are way out of balance.
One of the best outcomes of the Great Recession is that the American personal savings rate has gradually risen from less than 1% in April 2008 to 4% in May 2010 according to the Bureau of Economic Analysis. We are reducing our debt and increasing our savings and liquidity as we did in the old days. I hope this trend becomes the new, modern day norm – that it becomes a transformation rather than the current trend.
Like Hank Paulson, we have learned the importance of having appropriate liquid reserves. We now recommend that our fully retired clients have two years of living expenses in cash reserves and that our clients who are still working. have at least six months. These reserves help our clients tolerate the volatility of growth investments. As a wealth management firm, we have developed a cash reserve management system designed to help boost the yield on cash, even in a very low interest rate environment.
Jim Bell, CFP® is President and Founder of Bell Investment Advisors, Inc. 1111 Broadway, Sixteenth Floor in downtown Oakland where he co-manages the business with his wife Bonnie. The firm has been providing customized investment management, financial planning, and career & life coaching services since 1991. www.bellinvest.com 510-433-1066
Published in Piedmont Post on July 21, 2010