Falling off a cliff

Reuters has an interesting interview with Warren Buffet today. The thing I found somewhat amusing and incredulous was that “Buffett said Americans, including himself, did not predict the severity of home price declines, which led to problems with securitizations and other debt whose value depended on home prices continuing to rise, or at least not plummet.”

Okay, I KNEW that real estate was going to the dumps and foreclosures were imminent with all of the adjustable ARMs and bad subprime loans going around. I don’t care what you believe, but there aren’t enough jobs in America that can sustain all of the $500,000 homes for sale and being built. The bust was pretty much guaranteed in my book.

Regardless, there are several good points that Buffet makes in the article.

– the U.S. economy [has] “fallen off a cliff” but would eventually recover, although a rebound could kindle inflation worse than that experienced in the late 1970s
– efforts to stimulate the economy could trigger higher inflation once demand rebounds
– the economy “can’t turn around on a dime,” Buffett said it will be “running fine” in five years. “This country will work fine even if we screw it up”
– the “paralysis of confidence” in the sector is “silly” because of safeguards such as deposit insurance
– Consumers, meanwhile, should reduce their dependence on credit cards

I think that the last point is probably one of the biggest points to take to heart. Buffet said that he would “go broke” if he paid 18-20% every time he took out a loan. Neither should you. If you have serious credit card debt, stop using them now and cut all of them up except the one with the lowest rate. Start using debit cards, checks, and cash instead. Buy an inexpensive software program like Quicken to start tracking where you spend money, reconcile bank statements, and use it to create a family budget. It’s an invaluable tool, and I even use the business version to track my small business expenses.

Unless you plan to buy a home or car in the next year, consider closing unused credit accounts. Some credit card companies are even closing them for inactivity. The hit to your credit score is not worth the temptation to rack up more debt or open yourself to identity theft. Your credit score will increase once you show that you are responsible when it comes to your overall debts.


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