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The fall of three of the country's five major investment banks, along with the government bailout of insurance giant American International Group, has sent Wall Street reeling.
But, the troubles on the nationwide financial scene have yet to produce a major impact on folks here -- for now.
State Fair Community College economics instructor Joel Kazy said his students are paying close attention to what's happening. The students are most concerned about the precedent the government is setting by bailing out Freddie Mac and Fannie Mae, along with AIG, and how much it will cost.
(Kazy was contacted before President Bush on Friday announced plans for the government to buy hundreds of billions of dollars worth of suspect home mortgages and other debt held by financial institutions.)
"They're the ones (the students) who are going to have to pay that back," Kazy said.
Also, those seeking loans could be affected. Banks will likely begin tightening credit, as a result of losing three of the five major investment banks, said Joe Fluty, financial adviser with Edward Jones in Sedalia. That could mean borrowers will need to meet stiffer qualifications to receive loan approval.
"You're going to have to demonstrate a higher level of credit to get a loan," Fluty said. "That's something the industry has let slide. Banks are going to be more particular who gets a loan going forward."
Local banks usually avoid the high-interest, high-risk mortgage loans partially responsible for the collapse in the market, said Jeff Koetting, a senior vice president at Third National Bank.
"We don't make those types of mortgage loans, so we didn't get in trouble with having those bad mortgage loans," he said.
The problem was that the large mortgage companies had loose guidelines and granted some loans without down payments. Why would a company take such a risk?
"Those loans generate a higher interest rate," Koetting said. "They got greedy. The higher the risk, the more interest rate you can earn on them."
But, those bad mortgages caught up with them when the economy took a dive, Koetting said.
Third National looks at debt-to-income ratios, length of employment and credit rating, among other factors, when reviewing loan applications.
"We already had good underwriting skills, and we'll continue to use those," Koetting said.
As for 401(k) holders, there's no need to panic, Fluty said. The best way to react is to stay the course, be properly diversified and continue making regular contributions, he said.
"People who act correctly, a few years from now, are going to look back at 2008 and say that was a good year to put my money in," Fluty said.
The 401(k) investments are designed for long-term retirement goals. People who lack a diverse portfolio should consider a broader range of investments, Fluty said.
"The key to preparing for retirement has everything to do with diversification," Fluty said. "You cannot let a long term retirement goal be clouded by what's going on today."
Even Koetting, who oversees operations at Third National, said he took a look at his 401(k) when he heard about some of the troubled companies. He has a mutual fund with a big stock portfolio, so he didn't expect a significant drop even if it included AIG.
"That's why you diversify, so you don't have all your apples in one basket," he said.
Bill Dey, a retired vice president of finance at SFCC, said he thinks the turmoil on Wall Street will have "zero" effect on him. "So far, it hasn't really got down to me," he said.
Dey, 67, does have a mutual fund, but is unconcerned about the nationwide financial woes because he is looking at the long term.
"I guess I'm one of those ones who says, 'Well, depending on how you look at it, eventually it will come back up,'" he said.
Really, Dey said he doesn't see an alternative for his investments. "What would I do with it?," he said. "Buy gold? Put it in a savings account? ... Cash it in and bury it in a hole in my backyard?"
Some people look to history for direction.
"Our economy has always rebounded," Fluty said. "There's always a cycle from top to bottom. When we get to the bottom we've always had a resilient and powerful recovery every time in history. It's my job to help people keep that into perspective. It's difficult. It's natural to get caught up so much in the turmoil."
Dey also turns to the past. The American economy survived the Great Depression of the 1930s, and the savings and loan debacle of the 1980s.
"I'm one of these people who think America's great for the long term, and everything will be OK," Dey said.
Kazy, who teaches other business courses at SFCC, said one thing is certain --the situation is complicated.
"I think it's just too complicated for the average person to digest, and I'll include myself in that," he said.
To see more of The Sedalia Democrat or to subscribe to the newspaper, go to http://www.sedaliademocrat.com. Copyright (c) 2008, The Sedalia Democrat, Sedalia, Mo. Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
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