MTS_Kirkwood: What am I to teach my children after this crisis?

Where did all of the money (from the Federtal Reserve)originally borrowed
for services and collateral go? -and- where is the money coming from (from the Federal Reserve?) to pay off those original loans?

Who puts money into the Federal Reserve? Why do we have to pay such a mark up to rent our money back? -and- why are we authorizing a repeat of what just happened by re-capitalizing the same people to do it again?

Could this mean that the American people will pay for those original loans a third time without being paid back?

David Nicklaus: That's a thought-provoking question, MTS. Many aspects of this crisis would be over kids' heads -- I'm not sure there's a way to bring mortgage-backed securities down to the first-grade level. But I think there are a couple of big themes that you can convey to your children. (I'm thinking, especially, of teen-agers who are at a crucial age for forming lifelong financial habits).

1. Too much debt is bad. For banks, hedge funds and individuals alike, overleveraging has proven to be the road to ruin. As a nation, we've been running up our credit cards and using our houses as ATMs, and we're clearly going to have to find a way to live within our means.

2. Good times don't go on forever. You really do need to have that rainy-day savings account. You can't control whether the fate of your employer or of the entire economy, but you can control how prepared you are for adversity.

3. Flexibility and lifelong learning are the keys to a satisfying career. Don't count on hitching your star to a particular industry; we've seen plenty of dream jobs disappear in everything from investment banking to auto manufacturing. Focus on developing the skills and knowledge that will have value to a variety of potential employers.


Regarding your questions about the bailout -- yes, to some extent we are recapitalizing the very institutions that made some critical errors. We're depending partly on experience, and partly on regulators, to teach them not to make the same mistakes twice.

mjfeldstein: Dave,

I recently purchased a new home and now I'm going to be starting a new job next week. Have I taken advantage of the housing slump and gotten lucky in a down job market or am I taking too many risks considering the uncertainty of our economy?

David Nicklaus: Dear MJ,
If you are planning to resell the home in a year or two, you'd probably have been better off renting. It's going to take longer than that to work through the large inventory of unsold homes, in St. Louis and nationally. But if you're like most of us and you plan to live in the house for a long time, then, yes, this was a good time for you to buy.

Congratulations on the new job. It's in an expanding industry, and that's great. But I'll say the same thing that I mentioned as advice for young people in the previous answer: Make sure your skills are up to date, keep an eye out for new opportunities and never get in a rut.

David Nicklaus: Since written questions are scarce this morning, I'll answer one that a reader named Maryann left on my voice mail. She wants a recommendation for a good book on the basics of investing in the stock market.

A Random Walk Down Wall Street, by Burton Malkiel, is still my favorite. If it's too theoretical for you, you might try Malkiel's The Random Walk Guide to Investing: Ten Rules for Financial Success. Larry Swedroe, research director at Buckingham Asset Management in Clayton, has also written a series of books that are aimed at the average investor. I highly recommend any of them, especially "Rational Investing in Irrational Times" or "The Only Guide to a Winning Investment Strategy You'll Ever Need."

scribbler: The Treasury plans call for sweeping investments in banks. Do you think the federal government will end up buying shares in local banks? And will the capital injection be used to increase loaning activity or will banks use the capital to writedown more bad debts?

David Nicklaus: It's unclear how many banks the government will invest in. There had been talk of buying stock in perhaps hundreds of banks, but yesterday the Treasury committed $125 billion (out of an eventual $250 billion it plans to invest) to just 9 banks. I'm sure there are some smaller banks that would welcome the money, but I'm not sure how far it will trickle down. One key question for this market: Will the government invest in National City? That Cleveland-based bank, which has been struggling, badly needs new capital if it is to stay independent.

Your second question is the key to whether this all will work. Paulson and Bush are certainly jawboning the banks to expand lending, but clearly more writedowns are coming, and some of the banks probably need the new capital to cover their losses.

Jeremiah McWilliams: Dave,

What do you think will be the implications of the government taking equity stakes in banks? Do you think that will actually get them to lend, or will they mostly hoard the cash? Also, will the government be a silent investor, or will it start to exert some influence over banks' operations? Thanks.

David Nicklaus: Jeremiah, thanks for joining the conversation. As I said in the previous answer, it's possible that the banks will continue to hoard capital, because they don't know how bad the housing market is going to get or how many more mortgage-related losses they'll have to take.
The government's influence, so far, seems limited to restrictions on executive pay and on dividends. All of the world's past experience with nationalized banks teaches us that the less interference, the better. But if the economy gets worse and credit remains tight, would a new administration direct the banks to lend to certain industries? It could happen.