Happy New Year

When we look back on 2009, we see a year where missteps along the way could have plunged the world into another Great Depression. Picture a traditionalist like Herbert Hoover in charge. AIG, Citicorp, Bank of America, General Motors and Chrysler would have been left to fail. Millions more would now be out of work. Instead we are now buoyed on a sea of debt held primarily by China, but the US economy is still afloat.

As I write this, we have more good economic news. Last week, new unemployment claims dropped by 22,000 to a seasonally adjusted 432,000, the lowest number of claims since July 2008. Due to layoffs in the auto industry after the expiration of the cash for clunkers program, Michigan had the largest increase in new filings, with 8,382. California, Florida, Iowa and Missouri saw the next largest rise. In Tennessee claims dropped by 2,972, followed by Illinois, Pennsylvania, Georgia and North Carolina. People are still losing their jobs, still hurting, but the pain has lessened. Fighting unemployment will be the major focus of the Obama administration in the run up to the mid term 2010 election, so expect this picture to continue to improve, albeit slowly.

For those at the top of the economic ladder, much of the ill effect of the recession has passed. Over the holidays I spoke with one former investment banker who lamented that he had a rough year but still managed to walk away with a six figure income, due primarily to a 61% rise in the stock market since March. He benefited from the fact that stock prices are a leading economic indicator while actual employment lags. In contrast, a defense attorney I know whose cases are paid primarily by a budget challenged state, now faces foreclosure. The nascent recovery now favors some sectors, states and ethnic groups over others.

Those of us who stared into the abyss of homelessness in 2009 had a wake up call. Just three years ago, the hot trend was getting either an interest only or pay what you want mortgage, that would allow you to invest your cash elsewhere such as in a soaring stock market. Meanwhile your biggest investment was getting a federal subsidy through the mortgage interest tax deduction. How much equity you had tied up in your home did not affect its rate of appreciation. In fact, with a minimal amount of equity, your return on investment actually increased.  Until 2006, the trend always seemed to be up.

When home values fell, that paradigm collapsed. Today fixed rate mortgages are back in style. Down payments and building home equity have returned as laudable goals. Saving money is now in. Home finance counselors have traditionally suggested that consumers save a six month expense cushion of cash in insured accounts before investing in a home. Now financial pundit Suzie Orman for one, is urging a cash cushion of at least eight months.

As we embark on 2010, let’s meet the New Year with optimism and hope, while keeping a clear eyed assessment of the risks we face. Many of us were battered and bruised in 2009, yet we are still here. Remember that our parents and grandparents not only survived the Great Depression but launched a miracle of economic growth soon thereafter. We have challenges they didn’t face like a burgeoning population and global warming, but we can draw on unprecedented improvements in science, technology and communication.  It will take will, focus, and work to get our collective financial house together. Yet, we can.

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