Plan during ‘Normal’ time to meet a crisis

One Saturday morning, news first broke that fighting with Terrorists had ceased in the Taj Mahal Heritage and Tower hotel. For over 60 hours, people of Mumbai in India were on tenterhooks. They were emotionally intense hours of panic, chaos, fear, anger, grief, and frustration. Hundreds of people lay injured or dead. What will happen to the survivors? Does it matter whether the victims had financial plans, insurance, whether it was a term plan, whether they had judiciously allocated their assets?

Some of us will answer that question in the affirmative, and some in the negative. Both are right. When we are extremely saddened, we cease to think clearly. Grief takes control of our emotions, and it becomes difficult to concentrate. In fact, that is one of the reason why Hindus refrain from doing their regular pooja (worship) when there is a death in the family-bereaved people are too saddened to concentrate.

Once we overcome our grief and return to normalcy, we resume our worldly chores. Families who lost their loved ones will return to normalcy after a while. It’s at that point in time that sound planning can help them regain control of their lives faster. Plan during normal time to combat abnormal time. This is as true of our personal finances as of national security-consider the example of our National Security Guard, whose commandos prepare during normal times to combat abnormal times.

The same week witnessed a different sort of panic on the other side of the globe-Citibank being bailed out by the US government, and Bank of America in difficulty. Bailing out can be considered a form of nationalization. The government funds an institution, and in return gets control of it. In most countries, assets of corporates are pledged to financial institutions, against funds that the corporate borrow to expand their business. This is true in the US-all corporates’ assets are under lien to financial institutions, which are now being controlled-read owned-by the government. So we have a situation where corporate assets are owned by financial institutions that are in turn owned by the government.

Well, it’s definitely not the end of capitalism, but it’s certainly the fallout of excessive consumerism. Like any extreme too much consumerism is harmful. We all know the US is a borrowers’ economy. The country spends more than it earns. This means it’s either borrowing or depleting its savings in order to spend. The country has a negative savings rate. The average family in the US is servicing more debt than its earnings.

At an emotional level, this is due to the psyche of instant gratification and materialism. To satisfy their wants instantly, families borrow. Borrowing is nothing but spending unearned, uncertain future income today. When we borrow money, we immediately have funds to spend. Later, over time, we pay back the lender from our future earnings. The future is always full of uncertainty. In the future, if there is financial turbulence due to job loss, a slowing economy, sudden unplanned expenses, and so on, it creates financial pressure that would make it extremely difficult to pay back a loan.

Many US policymakers believed that as long as families kept spending, there would be demand for goods and services. And as long as there’s demand for goods and services, corporates will do well. They will create jobs. If there are jobs, families will have enough income to service loans.

Now think of the larger picture. The lender understands that his borrower is going to default. As long as it’s within control, the lender is safe-a few will default, but most will pay up. But if many borrowers default, the lender is in trouble. If the lender himself had borrowed from someone else, he will end up defaulting to a bigger lender. Such a domino effect is what led US financial institutions to the brink of bankruptcy. Now, tax payers’ money is being used to keep these financial institutions afloat.

Pushing demands to propel the economy is prudent economics. Pushing demands to propel the economy on borrowing money is greed. And greed will always lead to disaster.