So... What The F Is Going On [Economic Policy Primer]

If you have been feeling like you are, how shall I put it, at a bit of a loss lately about what the hell is going on, chin up. After watching mindnumbing amounts of coverage of this bailout bumblefuck, I am quite convinced no one else really knows what is going on. No one. From Paulson and Bernanke, to Bush and Cheney, to Dodd and Schumer and everyone else on the Senate Finance Committee, to the pundits and journalists trying to describe the scene, to just about everybody else, no one is sure how we got to DefCon 3 seemingly overnight--or even whether that's truly where we are right now. We're all just groping about trying to find something that sounds like a plausibly complete explanation. All I have to say is: good luck!

But in the event that you'd like more substance than pith, here's what I've got for you. The following is some of the best coverage I've found in the way of bailuot backstory, courtesy of your friendly neighborhood liberal arts major:

This American Life #355: The Giant Pool Of Money covers why so many institutions wanted to make so many bad loans in the first place and how the genius concept of mortgage bundling was supposed to keep everything nice and safe yet extremely lucrative and why it only succeeded at the latter. Free transcript and streaming, pay download option. I personally prefer Ira Glass, but if you're looking for a quick and dirty version of the above, try Kiplinger's summary of how we got into this jam, which is basically TAL condensed, and without the sexy/nerdy voice talent.

Ben Stein explains how the potential damage from crap mortgages is grossly magnified by the oh so sexily named Credit Default Swap in his recent Everything You Wanted to Know About the Credit Crisis But Were Afraid to Ask. CDSs take mortgage defaults that in the worst case scenario could total $250Bn and turns them into potential defaults of well over twice that amount.

And credit is getting tighter in many places, not just on mortgages and other home equity products, but on student loans, credit cars, car loans and personal loans. So it's not just Wall Street getting hammered, but normal folk, too.

There's a pop quiz study guide at the NYT, in the form of this handy timeline of the credit crisis, from 2001 to the present. Note that the Fed started cutting rates in September 2007 in an attempt to avoid pretty much where we are right now. Don't feel bad if you feel like this is beyond you and out of your control: at this point, so does the Fed.

So no one knows what's going on, but it's going to be at least three miles of bad road while Congress, the market, or the divine bookmaker in the sky sorts it out. In the meantime, what can you do in the way of covering your own ass?

1) Pay down any credit card debt. This is the single smartest thing you can do, economic crisis or no economic crisis, because every month you make an extra payment you buy yourself a little more freedom from The Man. Month by month, your minimum payment will drop, which reduces your monthly expenses and frees up more money for more debt repayment, for savings, or for basic necessities should you lose your job. And by paying down credit card debt at 15% or even 25%, you're getting about a million times better return than you'd get by putting it in a savings account. I pay my cards off every month, but Shiner is still plugging away at this. In just under a year, he's gone from $40,000 in debt to less than $15,000, and his monthly minimums are tiny compared to what he can pay off in principal. Extra incentive: credit card companies are leeches trying to bleed you dry. Show them who is boss.

2) Keep investing. You're buying shares on sale. I know it's scary, but you're way more likely than not to come out ahead in the long run--and by "long run" I mean "in the cat food years." Younger folks are are especially spooked by the current pantwetting and as a result aren't putting money in their 401(k)s. This means they're missing out on the biggest long-term gains. Keep putting money away for retirement, as much as you think you can, plus 1%--just to give yourself something to strive for. I am on track to max out the 401(k) this year. I've found that I stress less if I throw the quarterly reports directly into the shredder. I picked good funds, now it's time to both put up and shut up as much as it pains my heart.

3) Hoard some cash. Now, more than ever, you need an emergency fund. If you don't have any savings, set a goal of $500. Then $1,000. Then a goal of one month's expenses (note: this requires a rough knowledge of your average monthly expenses). Then save three months. Then six. Don't be discouraged, this is a long-term project, but anything you save is a little bit of security you didn't have before. If your job becomes shaky or your health or housing situation becomes unstable, you'll need to lean on your savings to carry you through. Keep your money somewhere safe. I recommend a high-yielf savings account like through ING or HSBC. Rate chase only if you have the energy for it. The most important part is that you are stashing money away somewhere. My goal is to have 4 months of expenses in savings by the end of the year. This month, I switched from a Roth 401(k) to a traditional 401(k) to allow me to hoard even more cash.

Some other well meaning people have ideas for you:
Marketwatch excerpts a bunch of people who have opinions about how to not screw yourself. My favorite? Take a cue from Douglas Adams and Don't Panic.
Consumerist suggests the 10 skills that will be most useful after global economic collapse: food preservation, second and third languages, basic cookery, budgeting, and self-denial all make an appearance on the list.

Leave your own tips in the comments.