Most of us don't appreciate the magic of cash until we are without it. Then we understand. Then we understand the advantages it affords us, what it will do, and how essential it is. But before then, we pretty much take it for granted. Today, many people assume that ready money will appear when necessary because, well, it has for so long.
Consider the most basic example.
How much cash do you carry?
Probably not much. You have lots of substitutes. Even when I travel, for instance, I seldom carry more than $200 because I have credit cards and live in a nation filled with ATMs. I fly, rent cars, eat in restaurants, sleep in hotels and do most everything without cash.
Measure the amount of cash you use in a year as a percent of your total spending and you'll find that you just don't need much of it. Others will always advance money to meet your slightest whim. They may even offer far more than you need or want.
If your life is like that, you know how good that feels. If your life isn't like that, making it that way is probably one of your front-burner projects. Either way, you know that your life is harder and more anxious when you rub your lamp and the genie fails to appear. That's when you can't get cash from an ATM or, heaven forbid, your credit card is turned down.
Today everyone -- individuals and institutions -- has begun to worry about whether their lamp is still working, or will work in the future. Central banks, including ours, have taken action to improve liquidity and fix Aladdin's lamp. A few weeks from now we'll start to have statistics. Today, here's an anecdote about what happens when the lamp stops working.
A good friend of mine is single, owns his own business that is growing and well-established, and has an income approaching $1 million a year. He is smart and relentlessly honest. I would trust him with my life. He pays his personal and business bills weekly. His business and personal credit cards have high limits that are seldom tested because the bills are paid when received.
Two weeks ago his offer on one of the more modest homes in Lake Forest, an exclusive gated community in north Dallas, was accepted -- a bit higher than $700,000. For him, this is not a big home loan -- at most he would be borrowing about eight (BEGIN ITALS)months(END ITALS) of income. For most home buyers, the amount borrowed is measured in (BEGIN ITALS)years(END ITALS) of income, often three to four years.
Confident, he called a mortgage broker he knows. He asked what kind of financing he could get.
"None," the broker told him.
The broker, like thousands of others all around the country, had just seen the entire mortgage market shut down. Eventually, offers appeared -- at over 7 percent plus additional points. (By the time you read this it will probably be functioning for non-jumbo loans and restarting for jumbos.)
My friend called a private bank, one of the old-fashioned banks that makes loans and keeps them as portfolio investments. They offered the necessary money. The private bank knew it would get its money back. The private bank also didn't make the toilet assumption -- "flush it and it will go away" -- that has been the operating assumption of Wall Street's subprime mortgage securitizers and the army of at-large brokers who get the loans done.
So my friend's problem went away. He will get his house.
But what about everyone else? My bet is that it will be tougher and more expensive for regular people to borrow money.
For those with Ready Money, that dark cloud will have a silver lining. They should make their shopping lists. Here are a few of the things that might be on that list:
- Financial-asset babies (the ones that got thrown out with the subprime bathwater). These include closed-end funds that are now selling at much deeper discounts to net asset value and some of the financial firms that have nothing to do with subprime loans.
- Surplus second homes. If you've ever had a hunger for a second home or condo in places like Florida, Phoenix or Las Vegas, this is a good time to shop. Plenty are available new, and those who want to sell existing homes will be surprised to find that their hoped-for price is greater than the price of some new homes. Builders get realistic faster.
- Overfinanced toys. Just as mortgage lenders have been foolish with their lending for homes, we can expect an oversupply of used motor and sail yachts coming on the market as owners discover they are deeply upside down because they financed them for too long a period. Ditto trailers and RVs of all kinds, not to mention toys like ski-mobiles, motorcycles and other things that can often be purchased on temporarily good terms. It's going to be a great year for heavy-duty yard sales.
And what should you do if you don't have Ready Money?
Polish your lamp -- reduce debt, savor the potential of cash and keep investing.