PIC Current

Well now, that was an interesting week.  And I don’t mean interesting in a good way, like finding change under the cushions of your couch.  I mean more like finding a dead rodent under your couch.

Courtesy of Shadowmancer76

So, let’s recap:

• Lehman Brothers went belly up after more than 150 years in business
• AIG was taken over by the Feds
• The U.S. Treasury is now insuring money-market funds
• The stock market started the week in free-fall, scaring almost everyone
• The government is now considering a plan to buy bad mortgage loans

All of these things are not only shocking, but taxpayers will be on the hook for hundreds of billions of dollars. The stock market has so far been calmed by the government moves, but many are holding their breath to see if another problem is going to crop up.

So what caused this disaster?  In a word: greed.  A word you might hear mentioned a lot is “leverage”: money borrowed to buy stock. This is how Wall Street titans do business now: with other people’s money.

Say you want to buy a stock at $10. You could pay $10 for the stock.  If it goes up to $11, you’ve made a nice 10% profit.

But if you’re big investment firm, you could borrow $9 and spend $1 of your own. Then, if the price jumps to $11, you’ve made $1, but it’s a 100% profit.  However, if the stock goes down, you lose your money and other people’s money, which you still have to pay back. 

These companies borrowed to buy mortgages and we all know how wonderful the housing market is with all the foreclosures.  So you might guess that these were terrible investments. You’d be right. And the Wll Street big guys lost their own money and the money of many others.  Maybe even your money.

All we can do right now is keep a close eye on events and try not to panic.  I think the government efforts will help.  But now we are all on the hook for the greed of a few on Wall Street.

Back on Monday with an update on ideas for you to get through the stormy money markets.