Personal Finance 101
What sank Washington Mutual after exactly 119 years as an independent institution? Although the ultimate blame lies with politicians, regulators, and executives who should be thankful the United States isn't China, the proximate cause, according to an official in the Office of Thrift Supervision, was the $16.7 billion in customer withdrawals over the nine days preceding WaMu's failure. According to the Wall Street Journal, that was nearly 9 percent of the bank's deposits, leaving it with "insufficient liquidity" and in an "unsound condition to transact business." It's worth noting that, according to Marketwatch.com, the bulk of those deposits were in accounts over the FDIC's $100,000 (now $250,000) cap. Certainly, once WaMu's eventual demise seemed certain, it was prudent to begin shifting those funds to more stable institutions. But overlimit deposits are inadvisable in even the best of times. As for those with assets under $100,000, I imagine Guido Perla, who the Seattle Post-Intelligencer reported as having texted his girlfriend the morning after WaMu was seized, telling her "Babe, you should change banks" and advising her to withdraw all her money, had plenty of counterparts in the days leading up to the biggest bank failure in U.S. history. If not for this massive run on the bank, perhaps WaMu would now be the object of a Wachovia-like tug-of-war instead of a bankrupt shell.
Am I blaming the victim here? No. Though many customers' behavior has been ill-advised and, in the words of another OTS official, "almost irrational," it's hardly surprising. (Don't even get me started on the WaMu employees who held "significant" amounts of company stock in their 401(k) plans.) I'm all for personal responsibility, but how much can you reasonably expect from a populace which is essentially financially illiterate? Those with power and smarts, however, should have known better. Greed got the best of them, and greed plus ignorance can be, as we now see, a disastrous combination. So, with all the virtual ink that has been spilled on the still-unfolding economic crisis — now spread far beyond our own borders — one might think a few more drops could be spilled on the topic of financial education. On a fundamental, national, programmatic level, not just reassuring Q&As. Yet, for some reason, the media is largely silent.
It could be argued that the middle of a crisis is no time to be thinking about anything other than measures to stave off an even greater collapse, but I would argue the contrary: that this is precisely the time to, as Morton Marcus writes in the Shelbyville [Indiana] News, "learn to fear financial ignorance" and take steps to ensure that our citizens have at least a rudimentary understanding of such a fundamentally important system. Yes, "too many homebuyers did not bother to learn what their obligations as homeowners would be," but to be fair, how would they have done so? Yet even those like economist Robert Schiller, who asks in the Washington Post "What are we learning?" and proposes a "better financial democracy," neglect this issue in favor of "defining a new generation of financial contracts ... build[ing] better derivatives ... learn[ing] to trust people and markets rather than institutions ... [and] listen[ing] more closely to financial theorists." All solid ideas, but what good will they be if no one understands them?
For all its flaws, the original Paulson plan had one redeeming feature: It was short and understandable — it runs three pages in length — and strictly on-topic. The bill defeated in the House on September 29 had been expanded to 110 pages, and H.R. 1424, which finally passed on October 3 and was signed into law by President Bush a few hours later, had ballooned to 451 pages and $850 billion, including nearly $150 billion in "politically enticing provisions bootstrapped to the original bill." You'd have thought that among all the money for motorsports racetracks, children's archery arrows, and wool resarch, Congress could have found a few dollars to address one of the root causes of this current mess, but you'd be wrong. The best I can say about the bailout package is that it brings us closer to mental-health parity in insurance coverage, and for that I am thankful.
Experience is said to be the best schoolmaster, but necessity does a fine job as well. I'd managed to teach myself quite a bit about money during my early twenties, thanks in large part to Bob Brinker, but it was having to become the executor of my parents' estates at the age of 25 that brought me to the point where, though I still don't understand the details of credit default swaps and collateralized debt obligations, I feel confident in my understanding of market basics and my personal and family financial situation. Unless we can bring more Americans to that same point, using the events of 2008 as an object lesson, I fear that no matter how many more trillions Congress throws at Wall Street, we will find ourselves in a similar crisis — sooner rather than later.