His latest enemy is Nouriel Roubini, a NYU economics professor often known as “Dr. Doom” for his bullish take on the economy.

I laugh at your puny rally and feeble notions of recovery

Roubini first caught my attention back in July, 2008, when he said that the recession was only half over, and would continue for another 12-to-18 months. He also added that although we’re in:

…the worst crisis since the great depression…

we’re not heading into financial Armageddon, or even a Japanese-style prolonged period of stagnation.

Earlier this year, he was back in the headlines, when he admitted that things were worse than he thought. Instead of 12-18 months (which would’ve been between July 09 and Jan 10), he revised his estimate to 24-36 months (I’m assuming that this is from the original prediction, but can’t tell for certain).

The Cramer feud began on March 25th, when Roubini spoke to Bloomberg Magazine and said:

The stock market is a bit ahead of the real macroeconomic and financial news…. We’ll have some major banks going belly up that will need to be taken over.

Also on March 25th, Roubini wrote an editorial in the New York Daily News in favor of Secretary of Treasury Timothy Geithner’s toxic asset plan.

While largely in favor of the plan, he ended by pointing out that the government may have to take drastic actions if it still doesn’t work:

What happens if removing toxic assets from a bank’s balance sheet at near-market prices shows it is effectively insolvent? Then we will have to face the elephant in the room. We may then have to start asking, “Why keep insolvent banks afloat?” And having asked that, we will have to search for ways to manage the ensuing systemic risk.

By the next day, Cramer was already on the attack. He opened his blog on The Street.com with the following insult:

Noriel Roubini, the New York University professor intoxicated with his prescience and vision, comes out with the astounding view that “some” U.S. banks will be nationalized. Forget that we have had one of the largest rallies in history since the oracle of Greenwich Village spoke last.

What I think matters is that I don’t know anyone who would disagree with him. It is obvious that more banks will be nationalized. What has mattered since the beginning of this crisis is that we have a few banks that are not going to be nationalized.

It seems as if Cramerthought that the strength of the big banks would be enough to turn the financial sector around.

I know Roubini and Nobel laureate Paul Krugman are both on the nationalization jihad, and they are compelling figures to believe in. However, if JPMorgan Chase, Wells Fargo, Bank of America, US Bancorp, PNC Financial, and Capital One keep rising they will be able to raise equity making it easier for them to take losses and will make them more profitable as investments.

Cramer then turns his attention to Roubini’s pessimistic views market and the recent rally:

But what Roubini and Krugman might be missing is the ability to build, through earnings and higher stock prices and forbearance, a perfect combination of lower loan charge-offs, more equity, and therefore increased solvency.

Or, in other words, those who think that things are not better off since the March bottom strike me as people who are as unrealistically bullish during the 2008 top. You have to adjust if the facts adjust and perhaps Roubini’s doing that by saying that “some” banks will be nationalized. If he isn’t, I think he will be wrong.

As far as I know Roubini did not respond to Cramer’s blog. But that didn’t stop Cramer from continuing on the warpath. On March 31st, he appeared in a video on The Street titled “Roubini is Wrong“, where he was interviewed on the topic of bank nationalization.

 When you look at Roubini, what he’s making a mistake on is Geithner. GeithnerI think is going behind the scenes as Treasury Secretary and saying “Listen, we’re done with that. We’re done with that.” It started with Bernankesaying on 60 Minutes “we’re done with that”, it’s now extended to Geithner saying “we’re done with that”. If the people who would be in charge of nationalizing are saying point blank they’re not going to nationalize, then Roubini’s logic has a fatal flaw in it.

Now he’s been a bear, and one of the things I like to judge people on is their calls [David's note - HA!], and what happened subsequently. When the market was at 6300, he came out very boldly and said we’re going down another 1000 points. Now I came out with a piece that said “you got to start buying here”, because if we only go down another 1000 points, you better get in….

I think that he has to be judged on this nationalization call, and I think that he’s going to look foolish because of the Treasury’s attitude towards nationalization.

Again, it’s worth noting that Roubini only said that some banks may need to be nationalized.

Yesterday, Roubini finally replied to Cramer, and he definitely took off the gloves:

Cramer is a buffoon. He was one of those who called six times in a row for this bear market rally to be a bull market rally, and he just got it wrong.

And after all this mess and Jon Stewart, he should just shut up because he has no shame….

He’s not a credible analyst. Every time it was a bear market rally he said it was the beginning of a bull, and he got it wrong.

He keeps insulting me personally and saying a bunch of lies. He doesn’t even know I was supporting it, so he lies.

The article also points out that Roubini has a history of accuracy. In 2006, he predicted that the worse recession in four decades was on it’s way.

With regards to the recent rally, Roubini thinks it’s just a bear market response to government intervention, and not the sign of a turnaround. He thinks we’ll test previous lows because of poor economic news, disappointing earnings, and also because banks will fail after the stress tests come out.

So what’s Cramer’s response? As far as I know, none yet. But if the Stewart feud taught us anything, it is that Cramer is not one to back down when challenged.

It’ll be interesting to see where this goes. Cramersaidhe wanted someone he could debate economics with, not just a comedian. It looks like he got his wish.

As you may know from previous posts, I have a problem with drainage on my property, and have made it a priority to fix. I have water flowing towards the house in a few places, and that could cause problems with my basement walls and foundation.

To fix it, I decided to put in additional drainage in three spots, as well as a small retaining wall to make sure I fix the problem the first time. Because of the importance of drainage (and the difficulty I had in putting in a previous retaining wall), I decided to hire someone to do this project.

I used the yellow pages to find contractors in the surrounding area that specialize in the type of work I need. I called 10 people, and asked to setup a time for an in-person interview. Even though I contacted the businesses and basically said: “I’m looking to spend several thousand dollars. Will you help me?”, only 5 called me back.

Of those 5, only one person showed up on time. The rest showed one hour late, two hours late, five hours late (showing up at 5:30 on a Friday night without calling first), and a day late (although they did at least call before showing up on Saturday).

After an in-person inspection, four of the companies promised a written estimate as soon as possible. One expected me to pay him $5000 without so much as a written estimate or statement of work. No thanks.

And even though it’s been two business days (four days altogether), I still only have one estimate. It’s no surprise that it’s from the lone company that showed up on time.

Simply put, I’m amazed with the lack of professionalism.

We’re in a recession, right? Shouldn’t businesses be trying harder for my business? I thought I’d be an ideal customer: someone with an urgent need to have thousands of dollars of work done, and wants to pay for it in cash. Maybe I’m just weird to expect customer service to improve when the market is more competitive and demand for work is down.

I had hoped that companies would act like they are eager for my business. At the very least, I expected them to return my calls, show up on time, and follow through on their word in a prompt manner.

I know that not all businesses are not like this, and the ones that practice good customer service are the ones that will survive the recession. As for me, I’ll be “voting with my dollars”, and going with the only company that showed up on time and gave me an estimate when they said they would.

Jeffery Kosnett at Kiplinger thinks so. He wrote an article called 10 Financial Myths Busted, where he describes 10 financial rules that were disproved by the recent crash.

I’m going to give you his list, along with my explanations and thoughts about whether anything has changed or not.

WUT IM BOUT 2 DO 2 TEH ECONOMY CUD BE DANGEROUS.DOAN TRY DIS AT HOME!

Myth 1: There’s always a hot market somewhere

In the past, it was thought that investments in places like Asia and Russia could prosper even if the US market was in the tank. There’s no way that everyone and everything can crash at once, right?

This time around, the whole world is doing just as bad as we are. Rather than disproving anything, I think the downturn just shows the importance of diversification, even if portfolios are generally down across the board.

Myth 2: Real estate behaves differently from other investments

When real estate kept climbing even thought the dot-com bust, many people thought that real estate acted independently of other financial investments, and could only keep growing. Boy, were they ever wrong.

Real estate and mortgages turned out to be the spark that bled, and took down the entire economy with it. It was a classic investment bubble, and showed that real estate plays by the same rules as anyone else (and may not even be as good of an investment as stocks).

Myth 3: Reliable dividend payers are safer than stocks

I’ll be honest and admit that I don’t own any individual stocks, let alone dividend payers. But the myth goes that some stocks with mediocre performance are worth keeping because you could always count on them to generate income. The current economy has changed that, and many companies are slashing their dividends.

Myth 4: Foreign investors can drain the economy overnight.

The author says that despite foreign investors holding $3.1 trillion of US Treasury debt, they can’t have an impact on our economy.

I’m either confused or paranoid, because that does seem like a potential threat to our economy and security. I’m not trying to say we should be xenophobes and cut off the rest of the world, but we should be aware of the impact that others could have on our economy.

Also, the fact that foreign investors haven’t sold US debt doesn’t prove anything. The author acknowledged that the entire world economy is in the crapper in the first myth, so where else are they going to go?

Myth 5: Gold is the best place to hide in a global economy

In early February, an ounce of gold traded for $910. That’s just where it sat a year ago, when world economies weren’t so bad off.

Gold has performed better than other types of investments recently, but typically does worse when times are tough. There is increased demand as an investment, as people look for protection against inflation. On the other hand, there is less demand and a greater supply for gold right now. Not only are people buying less gold in the form of jewelry, but many people are selling the jewelry they do have.

Myth 6: Life insurance is not a good investment

I strongly disagree with this one.

I acknowledge the importance of life insurance – I hold some myself. But it’s not an investment. It’s protection in case I die.

The author touts the benefits of life insurance, saying that the guaranteed payouts are enough to offset the higher expenses that go along with investing through insurance. If that wasn’t enough, he asks:

Have you checked your 401K recently?

I have a rebuttal.

Have you checked the interest rate on ING online savings recently? It’s been performing better than my 401K.

That doesn’t mean that you should put all your money in online savings. You’d actually lose money over the long run, as ING’s interest isn’t even keeping par with inflation recently.

Why do you need an additional middle man for your investments? If you want to invest in stocks or bonds, do it through an investment company. Not through your insurance.

Myth 7: The economic downturn dooms the dollar to irrelevance.

Normally when a country goes deeper into debt, it’s currency is worth less. But the dollar has actually been holding it’s own recently. Why is that?

There’s not many other places to go, and in spite of our massive national debt, the Treasury has never defaulted. Plus some foreign currencies were temporarily inflated by oil and commodities speculation.

Myth 8: Mass layoffs reward investors

Some people think that stocks go up when the number of employees goes down. It’s not always the case. Allstate stock lost 21% when they laid off 1000 employees – roughly 1.4% of it’s workforce.

Getting rid of people could show that you’re cutting costs and becoming a stronger, leaner company. Or it could signal that the bottom is about to drop out.

The bottom line? There’s no way to know what it means when pink slips are handed out.

Myth 9: It’s crucial to diversify a stock portfolio by investing style

This one is about the difference between growth and value stocks.

Growth refers to companies with expanding sales and profits. Value describes stocks selling for less than the the business is worth.

In a market where everything is down, it’s hard to tell what is what. According to the author, diversification is still important to any portfolio, but right now it’s not as useful to try to classify companies according to their style.

I don’t think that this myth – or any diversification rules – have been busted by the recent economy. It’s just as importance as ever to diversify.

Myth 10: A near perfect credit score will get you the best rate

This is another area where I strongly disagree with the author.

He’s trying to downplay the importance of a credit score, but that’s a load of rubbish. He can’t even come up with good examples:

Mortgage lenders prefer large down payments. Credit-card issuers are just as apt to reduce your credit line or raise your interest rate. And those 0% car loans? Often they last for only three years.

Again, that’s rubbish. He couldn’t even close list with a strong point.

Having a good credit score isn’t everything, but it gets you a heck of a lot further than anything else will. It’s normally the biggest determining factor for the interest rate for any debt you’ll take on.

I don’t get why the author is downplaying the importance of credit scores.

My take?

The more things change, the more they stay the same.

To tell the truth, I don’t think any of the myths about economics or investing have changed. If anything, the bubble has finally popped, so people are returning to the rules they should have followed all along.

What’s your opinion? Have the rules finally changed?

Businessweek recently broke away from their traditional audience, and featured an article of Advice for Young Investors. The name is slightly misleading, as it includes all financial facets – from insurance to home ownership – as investments.

The advice is mediocre at best, but it’s an interesting read, because it offers insight into the young financial mind (or at least what the media is telling us to think).

As I like to do with these types of articles, here is their list, along with my commentary.

1. Cash is king

Although cash offers the lowest returns, it’s a good foundation for any financial plan.

Without a cash reserve, your plans are at risk to be derailed by emergencies or a loss of income. Most young people just make up the difference with credit cards, but others could be forced to sell assets at the worst possible times.

Having cash may not help you get ahead, but it will make sure you don’t go backwards.

How much of a reserve do you need? That’s a question of eternal debate, but the most common answers suggest anywhere from 3-9 months.

2. Got insurance?

It’s probably not the insurance you’re thinking about. Most young people don’t need life insurance, but everyone needs disability. You don’t want a lifetime of potential income to disappear because of an accident.

I signed up for as much disability insurance as possible from work, paying extra for additional coverage.

3. To own or not to own, that is the question

The biggest decision that most young people make is whether to rent or buy their home. The common perception is that owning is an investment, but real estate generally doesn’t perform as well as stocks, and it’s a lot more expensive. There is maintenance, taxes, emergency repairs, etc… that are exclusive to owning a house. Not to mention there is a significant time commitment.

In the end, it really comes down to your personal preference. Just make sure that you do the math, and consider all costs in your decision.

Also, don’t buy more house than you need, thinking it will increase as an investment… you’re much better off being modest and saving/investing the extra money you would’ve put into the house.

4. What job security?

The author points out that no ones job is safe right now, which I agree with. However, I disagree with one of his takeaways.

He says that your job security should be taken into considering when choosing a risk level for your investments. I disagree.

Investments are done over the long term. If you need your money to supplement your regular income, then you’re not really investing, and you’re gambling with cash that you don’t have.

Your risk tolerance should be determined by how long you’ll be investing… not how secure your current job is.

5. What’s your risk tolerance?

Another failure for the author. He underestimates the impact of long term investing.

If you’re saving for the long term, you probably have some time to ride out market turbulence… That’s how it’s supposed to work in the abstract, anyway. In reality, the ups and downs of the market can leave you anxious and cause you to bail out of investments too early.

While that statement is technically true, to me it doesn’t do enough to explain that short term ups and downs are normal, and you should just ride them out. It also doesn’t do anything to remind young investors that being overly cautious is a bigger threat than being too aggressive.

6. Stocks are risky

Another swing and a miss! Three in a row.

The author is right…stocks are risky, and you shouldn’t have any money in the market if you’ll need it in the next five years.

But the article again continues to be overly cautious, suggesting that:

For young people in their twenties, 50% or more of a 401K or other retirement plan could go into equities. (my emphasis).

Choosing 50% as a benchmark is misleading, because it suggests that it’s an upper limit. This could deceive people into choosing a 50% stock mix and thinking that they’re being aggressive enough. In reality, investors of any age – and almost certainly young investors – will probably want a portfolio that is more than 50% stocks.

Some people are even suggesting that young investors should put 100% of their portfolio in stocks (a strategy which I follow).

By choosing an overly cautious approach, you’re selling yourself short and missing out on decades of earning power.

7. Get started – now now now!

We’re back on solid ground with this one. Whatever your plan – start now. The best time to plant an oak tree is 20 years ago. The second best time is now.

8. Balance your priorities

Managing your finances is a lot like a juggling act. You’ve got to balance the short-term and long-term, paying down debt vs. investing for retirement, etc…. It’s important to make sure you’re meeting all your goals, and not selling yourself short by focusing on only one thing at a time.

As an example, I’m building an emergency fund as I’m paying down debt. I’ll be opening a Roth IRA soon. Starting on all three will be better for me financially than just focusing on one.

9. Be flexible

It sounds like decent advice at first, but this is another area where the author just doesn’t get it.

The financial crisis and stock market collapse have changed the rules for investors… For now, he’s allocating a maximum of only 50% of portfolios to stocks… This may not be the best time to set up a financial plan that you stick with for life.

Financial plans are not dependent upon the ebb and flow of the market. If anything, it’s more important to stick to your plan in tough times.

Being cautious after the market has crashed won’t help you get your money back. If anything, it will only hurt your recovery when it finally turns around.

10. Can you save and invest too much?

It’s rare that young people set aside too much money, so I don’t think we have to worry about this. If saving too much is a problem for you, then I’m jealous.

Most people should be saving more cash and investing more in their retirement, but there are times when it makes sense to put your money elsewhere. Investing money in yourself – through training or education – could greatly increase your earning ability over your lifetime.

My thoughts

The advice in this article says more about the media than it does finance.

I feel like the mainstream media just doesn’t get it when it comes to young adults and money. It seems like they’re trying to use the economy to frighten us, when in reality, it’s an opportunity. We have 30-40 years until retirement.

They should be giving on advice on how to take advantage of the market… not telling us to bury our heads in the sand because the economy is scary.

Time Magazine recently got it right it right though, and that’s because they asked the Nielsen Company (famous for TV ratings) what people are buying in stores like Wal-Mart and Target. Rather than interpreting the data, they let the numbers speak for themselves.

Here’s a summary of their findings:

Increasing categories:

• Seasonal general merchandise – up 32% (includes thawing salt, body warmers, gift packages, and candy)
• Canning, freezing, and food prep supplies – up 11.5%
• Family planning – up 10.2%
• Fresh meat – up 7.3%
• Vegetables and grains – up 5.5%
• Pasta – up 4.4%
• Cheese – up 1.1%
• Wine and liquor – up, but no numbers given
• Baking supplies/mixes – up, but no numbers given

It seems like people are just cooking at home more in general, and are also downgrading their gift purchases. The “seasonal general merchandise” category includes things like holiday gift sets, so it seems like people may be skipping out on the flowers and jewelery for something a little more economical.

Decreasing categories

• Film and cameras – down 31.5%
• Sports and novelty cards – down 26.5%
• Magazines – down 17.1%
• Canned seafood – down 13.3%
• Jams, jellies, and spreads (including peanut butter) – down 12.1%
• Bottled water – down 11%
• Cookies and ice cream cones – down 9.7%
• Home accessories (includes kitchen gadgets, lawn and garden items, buckets, bins, and bath accessories) – down, but no numbers given
• Air fresheners and deodorizers – down, but no numbers given
• Insect repellent – down, but no numbers given
• Flu and cold remedies – down, but no numbers given

It’s pretty easy to cut non-necessities in a pinch.

It’s worth noting that the jams, jellies, and spreads category is skewed because of the various salmonella scares that have occurred recently. Otherwise I’m sure this one would be up.

I was surprised that canned seafood is down so much. Canned tuna is one of the cheapest (and healthiest) meal bases you can buy. I thought this one would’ve been on the increase, especially because fresh meat sales are up.

What it says about income

The authors also had some interesting takeaways. First, they said that the trend applies to all income levels.

People think they have to hunker down, no matter what their socioeconomic status.

I find that surprising, but encouraging. Hopefully people of all incomes are realizing the importance of having a solid financial base, including spending more responsibly. Not necessarily spending less, but more responsibly.

What it says about long term habits

Another conclusion they reached (that I disagree with), is that:

What’s more, experts say… lagging products shouldn’t expect a rebound anytime soon. The back-to-basics movement is here to stay.

I don’t agree with this. I think that people will change their habits as long as they feel the pressure, but once things are back to normal and they’re not worried about their job, they’ll return to their old ways.

If there’s any change, it might be that consumers build a bigger emergency fund, but nothing else will be different. People have a short memory, and history tends to repeat itself.

If we learn from our mistakes, why wasn’t there a sustained push for energy independence after the oil shortages of the 70s? Why did the dot com bubble of the 2000’s lead right into a real estate bubble?

I think it’s great that people are acting more responsible now, but I don’t think it means that the changes are permanent by any means. For a more detailed discussion about why I feel that way, check out my post on Consumers Cut Back, but Have they Changed Their Ways?

Instead of back-and-forth cheap shots, we got too see a live debate between Jon Stewart and Jim Cramer.

To help you prepare for their showdown, I put together a summary of their fight so far.

Round 1 – The Daily Show takes on CNBC

On Wednesday, March 4th, Jon Stewart launched a scathing attack on CNBC. Blistering though it was, it was fairly level-headed, mostly using clips from CNBC itself (although some of these were taken out of context).

(view clip here)

The commentary was especially harsh on Cramer. Among other things, Stewart singled out his advice on Bear Stearns, Bank of America, his advice to accept and buy things that are overvalued.

Round 2 – Cramer responds in an online article

On Monday, March 9th, Carmer responded in a post on Mainstreet.com.

He defended himself on four points:

• His video clip was taken out of context
• His advice was actually right, because it referred to the safety of deposits, not the value of Bear Stearns
• He never recommended to buy Bearn Stearns
• He told viewer that Bear Stearns stock was worthless in a timely fashion

While I agree that the clip was taken out of context, I can’t say that I agree with the rest of his points. For more details, check out my post on Cramer’s response. It contains the full text of his rebuttal, as well as a critical analysis of his arguments.

Round 3 – Stewart responds to Cramer’s rebuttal

The staff at the Daily Show was on top of things, and Monday night, they did another segment – this time specifically on Cramer’s rebuttal

(view clip here)

After lambasting some of the shows and commentators on CNBC, Stewart addressed Cramer’s points from earlier in the day.

The bottom line is that even though Stewart acknowledged the Bear Stearns clip was taken out of context, he stood by everything he had said Monday night.

To prove his point, he showed clips of Cramer recommending to buy Bear Stearns on March 6th, 2008, and again on January 24th, 2008.

To make sure he was perfectly clear, he ended the segment the same way he ended the first one:

F*ck You!!! 

Round 4  – Cramer starts the rounds on the NBC networks

On Tuesday, Cramer started trumping up his defensive campaign. In the morning, he appeared on the Today show.

(view clip here)

When the host brought up the Daily Show, Cramer appeared uncomfortable and even agitated.

Rather than replying to Stewart’s criticism directly, he chose to belittle his critic:

Oh, a comedian! A comedian is attacking me. WOW! He runs a variety show!

After that, he tried to change the topic, and pointed out how he told everybody to sell stocks on October 6th, 2008, or as he likes to call it, “35% ago”. He tried to further deflect criticism by saying that the whole market is down, and he could find clips that would make Warren Buffet look like a fool.

He did not say anything else about Stewart’s criticism, except in his closing remark:

When Stewart makes that call [telling everyone to sell] I’m all over him, but he won’t do that – because he’s a comedian.

Round 5 – The NBC tour continues

Cramer also appeared on Morning Joe (with host Joe Scarborough) on MSNBC.

Oddly enough, Cramer didn’t do much talking.

(view clip here)

He was introduced as a man under attack by the White House – and also by Jon Stewart. Which is puzzling. Earlier in the day, Stewart was “just a comedian.” But now, he’s worth of an equal mention with the President?

Scarborough did all the talking, and started by trying to say that Stewart was attacking Cramer because there wasn’t a Bush in the White House to pick on.

Cramer responded by trying to turn away from the rhetoric, and instead offering a plea:

If Jon Stewart wants to debate the merits of tier-1 captial vs. common equity, I’ll do it. But the guys a comedian, and he’s decided to focus on some calls I made during a bull market.

It’s entirely possible he could run tape from Warren Buffet saying GE’s a good buy at $22, and the stock’s at $7. But no one’s going to make fun of Buffet because he’s a rich, big powerful guy.

I have a few problems with this.

While I appreciate Cramer’s statement that he wanted to get away from rhetoric, I can’t help but notice he was laughing while he said it. And if Cramer is going to continue to dismiss Stewart’s opinion as a comedian, he should stop appearing on national TV to respond to his criticism.

Also, call me crazy – but sound investment advice applies during bull or bear markets, right? If not, it’s just a strategy to time the market.

After that, Joe Scarborough took center stage, and basically used the entire segment to bash Stewart, the Daily Show, and late night comedy in general.

Cramer did admit to making mistakes, but again banged his chest and pointed to October 6th when he said that you should take you money out if you need it in the next six months.

Scarborough continued to talk about the angry leftist media, and implied that they responded to Sanetlli’s “Chicago Tea Party” rant with a conspiracy.

And suddenly everything went viral, so it was only a matter of time before they started digging through transcripts, and they came up with these attacks…

Maybe Jon Stewart can tell now us what the markets are going to do over the next five to ten years? Maybe he can tell us what’s going to happen next in Iraq?

Which again, is interesting that they want a  simple comedian to predict the complexities of the stock market and international combat.

There’s really not much to see from the rest of the appearance…Cramer really didn’t talk much, and Scarborough used it to bash the nature of comedy and late night talk shows, rather than responding to any of the points that Stewart has made.

Round 6 – Stewart responds to the NBC tour

Tuesday night on the Daily Show, Stewart took off all the gloves.

(view clip here)

To be honest, last night’s segment didn’t add anything intellectual to the ongoing debate. But it was hilarious. Probably one of the funniest intros on the Daily Show that I’ve seen in a long time.

Stewart knocked Cramer for making the media rounds on the NBC networks, and then reminded viewers that Stewart also works for a powerful media conglomerate. Comedy Central’s owners also own companies like Nickelodeon, MTV, VH1, etc….

To make fun of Cramer, Stewart appeared in a segment with Dora the Explorer talking about the ongoing feud, and then did something similar with the cast of MTV’s The Hills.

Again, funny, but it added little to the debate.

Round 7 – Stewart promotes the Cramer interview

The Daily Show took on Cramer again last night.

(view the clip here)

This time it was just to promote the upcoming debate and interview. Again, little substance, but plenty of comedy. This time, most of it was directed at the media’s coverage of the feud, rather than anything having to do with Cramer.

What to do during the debate…I propose a drinking game

Keeping in line with the presidential debates, I’d like to propose a Cramer vs. Stewart drinking game. After all, he is just a comedian.

I think that if you hear any of the following phrases, you should take a good long drink:

• Tier 1
• Chicago Tea Party
• October 6th, 2008
• 35% down
• Just a comedian
• Just an analyst
• Bear Stearns
• In Cramer we trust
• Warren Buffet
• Ideological
• Leftist
• F*ck you!
• Daily Show
• Comedy Central
• CNBC
• (any reference to a show on CNBC that doesn’t exist)
• Bear market
• Bull market
• (any sound effect that is played)
• (any happy visuals put up behind Cramer)
• (any time Cramer hits his hand on a desk or table)
• (any time Stewart hits his hand on his desk, presumably to mock Cramer)

I hope you enjoy the debate… regardless of which side you’re on, it’ll be fun to watch.

PS – I have more than just Stewart and Cramer posts. Look for my regular material to return soon!

Last week on the Daily Show, Jon Stewart delivered a blistering commentary on Jim Cramer and Co. at CNBC. On Monday, Cramer responded in his blog at Mainstreet.com. Here was the portion directed at Stewart:

The pundits won’t engage in the merits of, say, favoring Tier 1 capital for the banks vs. common equity, or forbearing on the banks to work the situation out over time because the banks can be profitable if we have some patience. They just attack me.

Take Frank Rich and Jon Stewart. Both seize on the urban legend that I recommended Bear Stearns the week before it collapsed, even though I was saying that I thought it could be worthless as soon as the following week.

I did tell an emailer that his deposit in his account at Bear Stearns was safe, but through a clever sound bite, Stewart, and subsequently Rich — neither of whom have bothered to listen to the context of the pulled quote — pass off the notion of account safety as an out-and-out buy recommendation.

The absurdity astounds me. If you called Mad Money and asked me about Citigroup, I would tell you that the common stock might be worthless, but I would never tell you to pull your money out of the bank because I was worried about its solvency.

Your money is safe in Citi as I said it was in Bear. The fact that I was right rankles me even more. I never said the same thing about Lehman, where your accounts weren’t safe.

I expect a skewering from the comedian Stewart. I was shocked, however, that the rigorous Rich wouldn’t investigate further and relied on the show’struncation of the truth.

His rebuttal comes down to four key points:

1. His quote on leaving your money in Bear Stearns on March 11th, 2008 was intentionally taken out of context
2. He was right, because he was referring to the safety of deposits in the bank, not the value of the stock
3. He never recommended Bear Stearns as an outright buy
4. As early as the following week, he said that Bear Stearns might be worthless

In the interest of fairness, I’m going to take a look at all the claims, and provide links to all my sources. That way, you can be the judge.

1. The Bear Stearns Quote was taken out of context

Verdict: true.

The complete exchange from the March 11th show actually went like this:

Dear Jim:
Should I be worried about Bear Stearns in terms of liquidity, and get my money out of there?

Cramer says:
No no no! Bear Stearns is not in trouble. If anything, they’re more likely to be taken over. Don’t move your money from bear.

2. Cramer was right, because he was referring to the safety of deposits in the bank, not the value of the stock

Verdict: unclear, but I’ll give him the benefit of the doubt on this

While the original caller confirmed in a later episode that he was asking about the safety of his deposits (source: wikipedia), it’s still unclear what Cramer was referring to in his response.

He clarified his remarks on March 17th on CNBC’s Street Signs, saying:

Keeping money at Bear – I guess I could have caused a run on the bank and said take your money out of Bear. I guess people could say hold it, he’s saying buy the common stock. I mean, what the heck. I cannot cause a run.

It turned out the Federal Reserve guaranteed the money. I’m not going to tell people to pull money out of these places. The Federal Reserve is guaranteeing the money.

After reading his clarification, it seems like there are a few things noticeably absent in his original statement.

Nowhere did he mention anything about the FDIC or the Federal Reserve, or even use the word “deposits”, which would’ve made his intentions clear. And the blanket statement “Bear Stearns is not in trouble” is broad enough that it could seen as referring to stocks also.

3. Cramer never recommended Bear Stearns as an outright buy

Verdict: false.

It appears as if Cramer did not recommend to buy Bear Stearns on the March 11th show, although many many of the sites that track his show interpreted it that way (such as the unofficial Cramers-Mad-Money.com or the equally unofficial Seeking Alpha: Kramer’s Picks).

However, if you go back to Cramer’s March 6th show, he had the following to say during his “Buy / Sell” segment:

I believe in the Bear Stearns franchise. Bear Stearns at $69 bucks? I’m not giving up on the thing.

That sounds like a recommendation to buy, or certainly not to sell, to me.

In the Lightning Round segment of the same show, he added:

Bear’s a great financial brand, but aside of Hudson City Bancorp, [I] can’t get behind any banks in the market

If Cramer’s advice on was not a recommendation to buy, it was walking a fine line (and he definitely never suggested selling). He had established a pattern of defending and praising Bear Stearns in the two weeks prior to their collapse.

4. As early as the following week, he said that Bear Stearns might be worthless

Verdict: true, but ultimately pointless.

Cramer may have actually said it that same week, on Friday, March 14th, at least according to another statement he made on the March 17th episode of Street Signs:

I said the common stock was worthless on Friday, as soon as this thing was at 36 because we saw a look at the bonds. If you kept your money in Bear you made out. You got the liquidity.

Even if he did say that Friday, it would have done little for investors. By that point, the stock had been plummeting for three days.

Here’s the history of Bear Stearns from that week (according to Bloomberg.com, the wikipedia history of Bear Stearns, and a page about the Bear Stearn class action lawsuit):

• On Tuesday, March 11th,  Bear Stearns closed at $62.97.
• On Wednesday, March 12, Bear Stearns closed at $61.58. CEO Alan Schwartz realized the company wouldn’t have enough cash to operate through the end of the week, and called government officials, regulators, and JP Morgan’s CEO.
• On Thursday, March 13th, the stock closed at $57. After a series of late night discussions, the Fed announced they were providing cash, but only through JP Morgan, because Bear Stearn didn’t have direct access to the Fed.
• On Friday, March 14th, the emergency loan deal was announced, and the bottom fell out. The stock closed at $30.
• On Sunday, March 16th, JP Morgan made an offer to buy Bear Stearns for $2 per share.
• On Monday, March 18th, Bear Stearns opened trading at $3 a share.

So even if Cramer did call the stock worthless at $36, that still would’ve been after a drop of 43.8% over just three days.

Couple that with the fact that the only way Bear Stearns could get emergency funding was through another bank, and it shouldn’t have been a surprise to anyone that the company was in dire straights by that point.

Summary

Cramer was at least partially correct in his rebuttal, but he failed to deliver a knock out punch in vindicating himself.

All he said was basically “you can’t prove that I said to buy Bear Stearns,” but for me, that’s not very satisfying. He couldn’t prove it wasn’t what he meant, and the best follow up he had was to call it worthless shortly before the Federal Reserve and the Treasury Department forced Bear Stearns to sell itself. Not exactly timely advice.

Also, despite replying in a six page blog entry, Cramer only found time to reply to one of Stewart’s five criticisms. I read Cramer’sresponse with an open mind, but in my opinion, it left a lot of questions unanswered.

His original intent was to interview Rick Santelli, the analyst who called for a “Chicago Tea Party”. For those not familiar with Santelli, he became a poster boy for anger on Wall Street when he rallied against Obama’s mortgage plan, live from the floor of the Chicago Mercantile Exchange:

How about this, President and new administration – why don’t you put up a website to have people vote on the internet, as a referendum to see if we really want to subsidize the losers’ mortgages? This is America!

How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom, and can’t pay their bills, raise your hands.  President Obama, are you listening?

Santelli was supposed to appear on the show last Friday, but cancelled at the last minute. I was disappointed, and apparently so was Jon Stewart. Here is his response to Santelli’s rant:

Yeah man! Wall Street is mad as hell! And they’re not going to take it anymore. Unless by “it”, you mean $2 trillion in their own bailout money. That, they’ll take…

But see, Rick Santelli is angry that these loser homeowners are going to get bailed out. He believes in personal responsibility. He believes in not rewarding the losers for missing all the warning signs.

I mean, for God’s sake, the guy works at CNBC! They’re the best of the best!

So to all you dumb*ss homeowners out there who let your optimism and bad judgement blind you into accepting money that was offered to you from banks, educate yourselves!

After Santelli bailed, The Daily Show decided to do an investigative piece on CNBC’s investment advice. The findings were less than flattering.

They ran through some of CNBC’s least-greatest hits, and then showed what happened afterwards. Here are the highlights:

March 11th, 2008 – Jim Cramer

• Prediction: “Bear Stearns is fine – do not take your money out! If there’s one take away, it’s that Bear Stearns is not in trouble.”
• Actual: Bear Stearns went under six days later.

June 5th, 2008 – Power Lunch

• Prediction: “[Lehman Brothers is no Bear Stearns]. You can’t compare Bear management and Lehman management. Lehman management is incredibly engaged and responsive.”
• Actual: Lehman Brothers went under three months later.

April 17th, 2008 – Squawk on the Street

• Prediction: “Will Merrill need to raise capital? No. That continues to be the refrain from management, from Mr. Thain. They raised $12.8 billion in capital, $4.2 of that was excess capital. No need to raise capital says Merrill Lynch.”
• Actual: Five months later, Merrill Lynch ran out of capital. It is now owned by Bank of America.

October 4th, 2007 – Jim Cramer

• Prediction: “Bank of America is now the cheapest and the best. And I have to admit, that as much as I like Wachovia, I think Bank of America is going to 60 in a heartbeat.”
• Action: As of [Wednesday], Bank of America trades under $4

December 5th, 2007 – Home Front

• Prediction: “What [AIG] is saying now is that their sub-prime losses or exposure, whatever’s going to happen to them. Is very manageable. Does it mean that they’re not going bankupt? Obviously they’re not, they’re the biggest insurance company in the world.
• Actual: Federal bailout money for AIG – $85 billion in September, $37.8 billion more in October, $30 billion more on Monday.

October 31st, 2007 – Jim Cramer

• Prediction: “You should be buying things, and accept that they’re overvalued, and accept that they’re going to keep going higher. I know that sounds irresponsible, but that’s how you make the money.”

February 1st, 2008 – Jim Cramer

• Prediction: “That’s why the market just won’t quit, no matter how poorly the actual companies are doing.”

April 16th, 2008 – Kudlow and Company

• Prediction: “The worst of this sub-prime business is over.”

June 13th, 2008 – Jim Cramer

• Prediction: “Very simply, I believe that it’s time to buy, buy, buy!”

November 4th, 2008 – Fast Money

• Prediction: “The fundamentals are coming back into play. I think people are starting to get their confidence back.”

It was fun watching someone take CNBC’s talking heads down a notch. They’re great at sound bytes, but not so much when it comes to advice. I’m glad someone finally called them out on it.

I’m not an expert, but I think Jon Stewart best summed up their knowledge and expertise when he said:

If I’d only followed CNBC’s advice, I’d have a million dollars today – provided that I started with one hundred million.

Insanity is doing the same thing, over and over again, but expecting different results.

I’ve been pushed around recently, and I’m tired of it. Responsible folks like myself are getting a bad name in the press. I’ve seen quite a few articles describing how people who save money are bad for the country. 

The latest insult came when I read something that explains How Savers Could Doom the Economy. According to the article – and the paradox of thrift - people who are more responsible in their personal finances are actually sabotaging the national economy. How selfish of us!

The line of thinking works something like this:

• If we, as consumers, cut back on spending in a recession, it only further hurts business. Sales continue to decrease, and as a result, so do stock prices.
• However, if we choose to increase spending again, business grows. Stock prices increase, and the economy expands again – hopefully averting a recession at the last minute (in a true Jack Bauer-like fashion).

What is your credit rating? I SAID WHAT IS YOUR CREDIT RATING?!?

I’m not an economist, but I see a few problems with this simplistic line of thinking.

First, it assumes that spending money can somehow solve problems that were caused by irresponsible spending.

Wasn’t the current economic downturn caused by the sub-prime mortgage crisis? People borrowed more than they could afford, assuming that the rising real estate prices would increase enough to make up for it. It’s was a fool’s gambit, and lenders were all too willing to play along.

The second problem with blaming savers is that it assumes businesses and consumers are obligated to act with the best interests of the national economy in mind. Not their self-interests.

Before we go any further, ask yourself this: do you think businesses do what’s best for their bottom line, or do they sacrifice themselves for the sake of the greater good?

Savers have become a scapegoat, when by all accounts it makes sense to spend less right now. Credit is tight and the job market is weak. Why shouldn’t we try to pay down debt and build an emergency fund?

I’ll take it a step further, and argue that savers are good for the economy. We’re thinking about long term success and prosperity. We won’t be late on our mortgage, miss credit card payments, or declare bankruptcy. We’ll pay our debts and live a sustainable lifestyle.

So what should us savers do to… well… save face? I propose that we refuse to take decisive action.

I’ve heard that there are some stock brokers demanding a new tea party. I say we follow their lead – kind of.

I say we refuse to buy tea, and then refuse to dump it in a major body of water. After all, we’re responsible. Why should we waste our money like that?

I’d rather show defiance by saving even more.

We’re turning into a nation of whimpering slaves to fear – fear of war, fear of poverty, fear of random terrorism, fear of getting down-sized or fired because of the plunging economy, fear of getting evicted for bad debts…

- Hunter S. Thompson, 2003

One thing that’s always bugged me about the media is how they pretend to be impartial observers, when the reality of it is that there is no way to observe something without interfering.

It’s physically impossible, even on a sub-atomic level. With the stock market, the stories that the media covers – and how they cover them - affects how investors behave.

The media loves to cover a sob story or train wreck, and they’ve been doing it to perfection with the economy. Fear gives them higher ratings than practical advice, so they resort to scare tactics.

Take a recent headline I saw on CNN on Friday, February 20th.

WALL STREET ON THE SKIDS

It was even accompanied by a live report from the floor of the NYSE. With a headline so shocking, you’d expect that the market was bottoming out.  But you’d be wrong.

The market was only down 129 points, which would have represented a decline of 1.73% from the previous day’s close. But why did CNN have the shocking headline? Is a drop of 1.73% unusual?

Not at all.

Over the past year, the average daily change in the market has been 1.71%.

In fact, 37.2% of the previous year’s trading days had a swing that was greater than what CNN was reporting on with doom and gloom. 13% actually had a change that was more than double what CNN was covering live.

(source: data from Yahoo Finance and my love of spreadsheets)

The take away? Don’t believe the hype. Make your decisions because you’ve done the math and thought about the consequences. Not because you’re reacting to a talking point, or some angry screaming haircut on TV told you to “SELL SELL SELL”.

I’m going to end this with another Hunter S. Thompson quote, because one is never enough. The man was a genius, and believed in never quitting – especially when “the establishment” gets you down. Here’s a quote from one of my favorite books, “Fear and Loathing in Las Vegas”, that shows his view on persistence in the face of fear.

“I hate to say this,” said my attorney…”but this place is getting to me. I think I’m getting the Fear.”

“Nonsense,” I said. “We came out here to find the American Dream, and now that we’re right in the main vortex you want to quit.” I grabbed his bicep and squeezed. “You must realize,” I said, “that we’ve found the main nerve.”

“I know,” he said. “That’s what gives me the Fear…”

“It won’t stop,” I said. “It’s not ever going to stop.”

By account balance:

Here is how investors with the following 401K balances fared last year. It should be noted that the percentages include new contributions.

• Balance less than $10,000: gained an average of 43%
• $10,000-$50,000: broke even
• $50,000-$100,000: loses averaged 15%
• $100,000-$200,000: loses averaged 21%
• More than $200,000: loses were more than 25%

I was surprised that the wealthy were hit disproportionately harder, but it makes sense if you give it a second thought. People with a low balance could more easily offset fund performance with new contributions.

It could also mean that new investors are taking a more cautious approach, choosing to invest more heavily in bonds than stocks. Hopefully that’s not the case, as being overly cautious is a good way to cheat yourself out of higher returns in the long term.

By Risk

In 2008:

• The average US stock fund fell by 38%
• The average US bond fund fell by 8%
• The average target date fund for 2010 lost 22%
• The average target date fund for 2040-2045 lost 38%

In short, there was no safe harbor last year. It’s not surprising that stocks fell so much, but it’s unusual that even the conservative bonds fell by so much.

In case you don’t know, “target date funds” are a kind of automated retirement fund. You invest your money in a fund for the year you want to retire, and they manage you investments, automatically adjusting your asset allocation and the mixture of stocks.

I’ve never been a big fan of them, because I don’t see how you can group so many different people with different strategies together. I’d rather take control of my own portfolio.

The “safe” 2010 fund lost 22% (worse than bonds), and that the 2040 funds lost the same amount as stocks. That only solidifies my stance against target date funds. No one will care for your money as much as you! Don’t give up control.

By Age and Job Tenure

It’s no surprise that older investors were hit harder. Here is how different age groups fared last year.

• Ages 25-34:
  • Less than 5 years on the job: gained 25%
  • Between 5-10 years: gained 5%
• Ages 35-44:
  • Less than 5 years on the job: gained 11%
  • More than 10 years: lost 21%
• Ages 45-55:
  • Less than 5 years on the job: gained 3%
  • Between 5-9 years: lost 18%
  • Between 20-29 years: lost 26%
• Ages 55-64:
  • Less than 5 years on the job: gained 1%
  • More than 20 years: lost 25%
  • On average, someone with 20-29 years experience will have to work (and contribute to their 401K) for an extra 21-25 months just to break even.

It’s not surprising that the impact went up with age, but I’m surprised that the amount of time on the job had such a big impact.

Summary

It was good to be a young, low-worth investor last year. Your net returns may have been positive, but if not, they were at least less negative than everyone else.

Not only that, but young investors have the most time to invest, and they’re in a unique position. We’re starting to save for retirement at a time when the market is at historic lows. It’s an opportunity.

I can’t help but feel guilty for complaining about my terrible returns last year. In spite of my funds losing more than 40%, I still ended up with a net return of +45%, thanks to my contributions and company matches.

It all goes to show that even in a down market, you still need to keep saving money for retirement. Giving into fear – and moving everything to bonds or pulling out altogether – may only make things worse in the long run.

I’m sure that other people will summarize it, but more importantly, I think that the best economic plan is to just take responsibility for your finances and stimulate yourself.  No one cares about your money as much as you, so why depend on the government to look out for your wallet?

The stimulus package really doesn’t affect me.  In June, I can expect to see another $13 in my weekly paycheck (a total of $400 for the rest of the year, and I plan on saving it all).  But other than that, its impact is minimal.

I don’t get a first-time home owner credit because I bought my house in January 2008.  To qualify, it had to be between April 2008 and December 2009.

I bought a house I can afford (only using two-thirds of the loan that I was approved for), so I won’t be getting any help with my mortgage.

I don’t get any tax credits for having an energy-efficient house, because I planned ahead and bought it that way.  If I was upgrading to an eco-friendly furnace or windows, I could get a credit for up to 30% of the cost.

At first, I was upset that I don’t get anything from the plan.  But then I realized that I don’t need the help, because I’ve been doing what I should be.

Another revelation I had is that depending on the government is just foolish.  Even if I did need help, the stimulus plan wouldn’t solve my problems.

To protect my finances, I need to stimulate myself.  Here’s how I’m going to do it.

1. Do the best that I can at my job every day.  I’m going to go above and beyond what is expected of me, and make sure that my contributions are noticed.

2. Start building a cash reserve.  I have a small emergency fund now, but it’s not enough.  This is a priority for me.  I’d like to save at least enough to cover a few months of expenses, just in case anything happens to my job.

3. Really start chipping away at my debt.  In good times, credit card bills don’t seem like a big deal.  But if something happens to my income, the debt would quickly turn from annoying to crippling.

4. Invest more.  It’s not enough to focus on the short term.  I need to think of the big picture too.  A down economy is an opportunity for long term investors, and I’d be a fool to not take advantage of it.  I need to save more money for my retirement (and put most of it into stocks).

5. Invest in myself.  I’m going to constantly increase my knowledge and skills, on both a personal and professional level.  There’s always room to learn more and better myself.

These steps may sound simple, and I know they won’t completely fireproof my finances, but it will do a heck of a lot more for me than anything the government could do.

What are you doing to stimulate yourself?

What am I doing to help protect myself?  I’m paying down debt, increasing my savings, and starting a vacation fund.

Starting a vacation fund?  In the middle of a recession?  Sounds, crazy, right?  But hear me out.  I think it’s a great idea.  Here’s why.

1. A vacation fund can be used as an emergency fund if the need arises.
2. It’s a motivational tool to get used to saving more money.  It’s a lot easier to save for something fun like an exotic trip than it is to save money and never use it.
3. It’s a motivational tool to work harder.  It’s nice to know that all the hours you put in at work are helping you reach something that you enjoy.
4. I’m improving my finances is so I can enjoy life.  Traveling is one of my favorite things, so I’m going to make sure that I do it more.
5. I need to do a better job balancing responsibility and fun.  I’m all for working hard, but you have to make sure to play hard sometimes too (as long as its done responsibly).
6. Right now, I’m ahead of schedule with my goals for paying down debt and starting an emergency fund.  Planning for vacations is not an irresponsible thing to do if I’m taking care of my other goals.
7. I’m going to want to take vacations anyway.  By planning for them in advance, I can pay for them in cash instead of using credit cards.

In light of all those things, I think starting a vacation fund is a great idea.  I’m excited just thinking about it.

It may not be the ideal thing to do for my finances, but then again, the ideal thing to do would be to just sit in the dark at home all the time, and eat nothing but ramen noodles.  However, that’s not practical or sustainable.  I’m improving my finances so I can live the good life.  Not so I can sit at home like a miser.

If I’m taking care of my other responsibilities, I don’t see a problem with paying cash to take a vacation.  By the time I actually go on a trip, my debt will be paid off, and I should have a good emergency fund started as well.  If that’s the case, I think I deserve to reward myself.

As a reader recently commented, it’s better to achieve progress over perfection (thanks DDFD).  I’m not going to be able to instantly start doing everything I should be all at once, but I can work to get there gradually.  If I’m making sustainable progress, I think taking vacations can be a responsible part of my plans, and could actually help me in the long run.  It will give me a sense of satisfaction for all the changes I’ve made so far, and motivate me to further improve my finances.

Like everything else in life though, this all depends on your unique situation.  And of course, it all depends on if you’re taking care of your other responsibilities.  I’m not suggesting that anyone should reckless, or abandon other more immediate priorities to go on a trip.  Not by any means

But if you’re in a good place with your finances, there’s nothing wrong with a little well-planned fun.  That’s what we’re all working for anyway, right?  What are your thoughts?

Money Central recently counted down a list of the top ten usual suspects.  I don’t think they got it quite right, so I’m going to summarize their list, then share my thoughts on who is really to blame.

10. Angelo Mozilo

Angelo was the head of Countrywide – the largest sub-prime lender in the country – until July 2008.  During the glory years, he collected $470 million in compensation, and made another $141 million by selling stock before Countrywide collapsed.  It was recently bought by Bank of America, who is now petitioning the government for additional bailout funds.

9. Hank Greenberg

Greenberg was the head of AIG, an insurance company that was saved only by an $85 billion bailout.  Hank was in charge from 1967 to 2005, a period which saw AIG get heavily involved in credit default swaps.  Last September, he personally appealed to the US government to save AIG, saying:

It’s a healthy company financially, except for liquidity.

Except for liquidity?  Famous last words.

8. Kathleen Corbet

I had not heard of Kathleen before, but she was head of the biggest credit rating agency, Standard and Poors, before she resigned dishonorably in 2007.

The credit rating agencies have been much maligned for not assessing the risks in the securitization of sub-prime mortgages.  Most agencies gave toxic mortgages a high credit rating, which helped attract investors.

7. George W. Bush

No introduction needed here.

The former President is blamed because he was at the helm when the economic meltdown occurred, and also because he failed to admit wrong doing or accept any responsibility.

Last July, he famously remarked that:

Wall Street got drunk.  It got drunk and now it’s got a hangover.  The question is, how long will it take to sober up and not try to do all these fancy financial instruments?

6. Gordon Brown

The Prime Minister of England doesn’t get off any easier than Bush did.

Some U.K. economists blame Brown for encouraging housing inflation and the rapid expansion of credit during his tenure as Chancellor of the Exchequer (the British equivalent of the Secretary of Treasury).

5. Fred Goodwin

This is another name that I didn’t recognize.  He was the CEO of the Royal Bank of Scotland from 2001 to 2008.  He oversaw a period of expansion, acquiring 26 banks over the course of seven years.  In 2003, he was chosen as the European Banker of the Year.

However, the aggressive growth proved disastrous when the credit crisis hit, and the bank nearly collapsed.  In 2008, he again won a banking award, though it was not quite as prestigious.  He was voted the World’s Worst Banker by the readers of Financial Time’s Alphaville blog.

4. John Tiner and Hector Sants

This pair headed the Financial Services Industry, which is Britain’s financial industry watchdog.  They are on their list for failing to keep a close eye on Northern Rock, UK’s fastest growing mortgage bank. 

The bank’s business model depended heavily on sub-prime secruitization, and came dangerously close to collapse in September 2007.  Customers feared the worst, and rushed to withdraw all their money.  It led to the first bank run in Britain in more than 140 years.

3. Alan Greenspan

Alan Greenspan was Chairman of the Federal Reserve from 1987 to 2006, serving under four US Presidents.  Though widely praised while in office, his policies have recently come under scrutiny as the economy whithered.

Some claim that his decision to drop interest rates to near zero following the September 11th attacks flooded the world with too much money and credit.  The effect was to stave off one recession, but possibly at the expense of an even bigger one.

2. Hank Paulson

Paulson is the current Treasury Secretary, and appears on the list for allowing Lehman Brothers to collapse.  The authors claim that this shattered the belief that financial institutions were too big to fail.  The result?  A run on every major bank in the world, and the “implosion of consumer and business confidence.”

1. Dick Fuld

Fuld was CEO of Lehman Brothers when it collapsed last September.  He is blamed for the company’s heavy exposure to sub-prime mortgage and debt, and his ethic of rewarding loyalty is thought to have silenced whistle blowers.

According to the article, bankruptcy for Lehman Brothers was not inevitable.  In the last months before the implosion, several potential buyers approached Fuld, but he refused to sell or act.  As a result, Lehmans collapsed, and “triggered the second destructive phase in the credit crunch and laid the foundations for a full blown global recession.”

My addition

While the people above may not have done everything they could to prevent the crisis, I don’t think it’s fair to blame them alone.  They acted as servants – to either the public or shareholders.  As such, we could have stopped them.  In the words of Mick Jagger:

I shouted out, “Who killed the Kennedys?”
When after all, it was you and me.

 As long as everyone was making money, no one bothered to look at the details.  The public can’t be mad when they never questioned the actions (or inactions) of the people on the above list.  Our apathy enabled a reckless series of events that culminated in a global recession.  No one person is to blame, because everyone is.

Lee Scott, CEO of Wal-Mart – one of the few retailers with strong sales – thinks that consumers may have changed for good.

I’m not necessarily convinced that just when all this liquidity and things hit, you’re going to have the same immediate desire to go back to consumption and debt.  There are a lot of young  people who have learned what it’s like when you are living on the edge and the bad times come.

So has a paradigm shift taken place?  I doubt it.

What we’re seeing is a lot like what happened to driving habbits after gas shot up to $4 a gallon.  For a short time, people drove significantly less.  The media covered the need for energy independence  and fuel efficient vehicles.  Then gas prices dropped again.  People drove more, and the media found other topics.

Why do I feel that financial responsibility is just a fad?  People are doing the same things they did before – they’re just trying to do them a little more cheaply.  Here are a few examples.

First, consumers are still buying big screen TVs.  They’re just buying them at different places.  The NY Times reported that while Best Buy had an unprecedented drop in big screen TV sales, Wal-Mart actually had an increase in the same area.

Second, people are still going out to bars to drink.  They’re just going during happy hour.  According to Kip Snyder, beverage director for the Yard House chain of restaurants:

We don’t see a change in what people are drinking as much as seeing a change in the time they are drinking.

People are still doing the same things.  Just at different times and places.  It’s a good way to save some money, but definitely not an indication that people have adopted financial responsibility as a way of life.

People will change their patterns as long as the economy is down.  But after it improves, most will just go back to their old ways.

If you’re unhappy with your financial situation, you need to remember that.  People who learn to fail from history are doomed to repeat their mistakes.  Your goal should be to make lasting changes.

Try writing down your financial goals, and revisit them regularly – even after the economy recovers.