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Financial Crisis Economic Equivalent of 9/11Losing Money and Value Not the Same When It Comes to Stocks and Home
Stocks and the money bundle paid for a house are gone, gone, gone. Where, during a financial crisis the economic equivalent of 9/11, did those trillions go, or did they?
The global financial picture is complex. However, looking at individual components of this colossal financial collapse provides some answers. Here is a quick take on stock and house values. Stock ValuesWhat did people lose when the market crashed? “The price of a stock has never been the same thing as money,” reports Yale University economist Robert Shiller, explaining it is merely the “best guess” of what the stock was worth the day it was bought or sold. In 1999, technical companies with no earnings or sales were valued at billions. Their 2000-2001 plunge erased trillions in value. Those who bought before the bubble expanded, and sold before it burst, made money. Those who stepped aboard late, then thought the beginning plunge was a few bad days on a fickle stock exchange, lost money. Warren Buffett is now buying bargain stocks, but overall the greed of a decade ago has turned to fear. Most stock portfolios have lost 30% or more in value. A Wachovia employee racked up stock and options from that bank thinking they were worth $600,000. He lost all the options and last week sold his stock for roughly $15,000. House ValuesHouse values didn’t go up as high as prices did. Low variable mortgage interest rates put Americans on a buying binge; the more buyers there were, the more house prices escalated. A house bought in 2003 for $350,000 wasn’t worth that. It probably was worth 75% of that ($262,500) or less. An askew house market historically corrected itself. This correction accelerated when interest rates rose and people couldn’t afford higher payments. Stock and house values, Shiller says, are what people—for various reasons—think they are. Shiller says an appraiser—perhaps swayed by recent comparable sales—may say a house is worth $400,000. Days later he may value it at $350,000. "In a sense, $50,000 just disappeared when he said that, but it's all in the mind," Shiller claims. Timing is EverythingMoney many are losing now is not crisp bills in their wallets or money from the ATM. It is money lost by not selling a house in 2005, or not selling stock in 2007. Likewise, some money people have lost is potential money. It may be money expected from selling stocks upon retirement, or selling a family home to downsize to a Florida condo in 2010. Today's biggest loss is the lower sum realized if stocks or a home are sold now. Some Losses Won’t ReturnPotential money is not the same as checking account funds. Harvard economics professor Dale Jorgenson explains it this way. Checking account money won’t vanish into thin air for no reason. The owner controls it. Money from selling a house or stocks at the wrong time is gone. Bad news? Some lost value may never return. Jorgenson, noting that financial stocks plunged 80%, sees those investments as a permanent loss. He expects “a huge shrinkage in the financial sector.” When money was a pile of gold coins, worth exactly the amount stamped on them, there was no cause to worry. Those days are gone. Most things of monetary value aren’t hand held. (A related article discusses the history of money.) SOURCES: “All That Money You’ve Lost,” by Eric Carvin, Associated Press/Yahoo News; “Those with Sense of History May Find Its Time to Invest,” by Alex Berenson, Oct. 11, 2008, New York Times; “Across the Country, Fear About Savings, the Job Market and Retirement,” Laura Holson, Oct. 11, 2008, New York Times.
The copyright of the article Financial Crisis Economic Equivalent of 9/11 in Investment is owned by Rosemary E. Bachelor. Permission to republish Financial Crisis Economic Equivalent of 9/11 in print or online must be granted by the author in writing.
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