Newspaper article THE JOURNAL RECORD

The Return of Risk to American Households

Newspaper article THE JOURNAL RECORD

The Return of Risk to American Households

Article excerpt

NEW YORK -- Following the stock market events of the past week or so, a new factor -- really an old factor reintroduced -- is to some degree affecting almost every household in America. It is risk.

Risk had become the forgotten element in the economy, having been dismissed from the popular mind as too inhibiting to tolerate in a new era of robust consumption and quick wealth.

Plentiful jobs, rising incomes, soaring stocks and easy credit helped boost confidence. And, as if to prove it was indeed a new era, the sort of inflation that had cursed earlier prosperous periods remained nascent.

A six-week loss of $2 trillion in stock valuations has shattered many dreams and undermined confidence. And not just among America's households, but at the biggest financial institutions.

More specifically, when the country's biggest financial institutions lose $8 billion on their Russian investments, and when the legendary investor George Soros becomes $2 billion poorer, everyone takes notice.

When the big guys, the international banks, the big brokerage firms and the gurus, are seen as witless in the face of events, it is bound to shake confidence down below. Reality destroys such pretenses.

For a while, soaring stocks allowed millions of Americans to believe they were rich, or at least more secure. And when you feel rich, even if you aren't, you plan, spend and borrow. It's called the wealth effect.

Suddenly that wealth evaporates, and the 20 percent of discretionary income so calmly budgeted for servicing consumer loans becomes ominously large. Executive options shrink, and so do vacation plans and big houses.

Risk is thus reintroduced and understood anew.

The risk quotient had been absent from the market for several years, says Michael Lament of Wright Investors' Service. And now that it is back, he says, it is not likely to be removed again quickly. …

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