Mortgage
calculator: is it better to rent or buy?
My nine-year-old asked me at breakfast on Monday morning: “What is the
economy?” What a day to find out. I struggled to describe a kind of weaved
knot in which every thread is connected to another thread, establishing
clearly that we are all in this together. If you made a lot of money in the
City, did you sew it up in a mattress? Buy a farm where you could live, grow
your own food and educate your children yourself? Or did you invest it - in
the City?
The size of a banker's pile of money is like the size of anything else in a
macho environment: you need the biggest one to show that you are good at
what you do. The pile does not necessarily reflect personal greed, it
reflects the need to be the best banker. It reflects how long and hard you
have worked. One man I know who worked at Lehman Brothers accumulated stock
in the company for decades and never got around to diversifying his
portfolio. This week he saw his net worth drop from a paper high of about
$100 million (£56 million) some months ago to virtually nothing.
Nobody at Lehman Brothers will be making a pile of money any more, real or
virtual. Nor do they have an income. Or an office, a BlackBerry, a plane
ticket to an important meeting out of town, a driver waiting downstairs. In
Chelsea there were anguished shouts heard on the pavements at 6.30am on
Monday, and people were breaking down in tears in Starbucks. A few Lehman
employees heard the news over the weekend and collected their belongings on
Sunday night so they wouldn't have to face the press.
Many of them are workaholics, accustomed to being under pressure for 18 hours
a day. We hear that they are frantically looking for work, and that a lucky
few are being recruited by former competitors. But how many jobs can there
be in this environment? Adjusting to being out of work will be hard for the
rest of them, adjusting to being out of luck even harder. Their self-esteem
may now be lower than their net worth. They have no place to go but home, to
tell the family.
And when they do get home, how long can they afford to stay if the rent is
high or a mortgage outstanding? What about the builders remodelling the
kitchen? The nanny and the cleaner? How will they pay for the private
school? The private health insurance? The car, the clubs, the tennis
lessons? Dining out, theatre, opera? Christmas presents, holidays,
charities? The accumulating pile, which to a banker serves as a report card,
means many different things to those who help to spend it and to those on
whom it is spent.
For every vanished pile there will be crying children, an angry spouse,
unemployed builders and domestic help, goods left on shop shelves, flats and
houses available to rent or buy, empty restaurants, and villages in Africa
that don't get their new water pump after all. Some Lehman wives feel that
their husbands were lied to by the firm; they were encouraged to stay, to
reinvest, to “engage their passion”, as the Lehman Brothers careers website
still forlornly urges. Those wives are wondering how their husbands could
stay loyal for so long despite all the warning signals. Why didn't they
devise a Plan B?
There may also be divorces, serious depressions, alcoholism, suicide, a rise
in crime, and a great deal of crushing boredom. That thing called the
future, which we all hold in the back of our mind as a time to which we can
look forward when our efforts finally come to fruition, when we will get
what we hope and work for, our prayers answered, our dreams fulfilled - that
future is no longer a shining promise pulling Lehman employees through a
hard day. It's just a bleak, endlessly rainy summer. Some will grieve over
lost possibilities for a long time.
Here's what is running through the head of one good friend - still employed -
who has worked in the City for more than 20 years. Can he salvage his
career, or is there a second career that he can start now? More importantly,
what has he been doing for the past 20 years anyway? If his achievements can
be wiped out in a day, or a few weeks, was it all just a paper game?
Funnily enough, he never felt rich. “It's a myth that people who work in the
City are rich,” he says. “If you pay your taxes and spend at anywhere near
the rate of your colleagues, you don't make enough to just walk away without
a drastic and painful change in your life.”
City people, like everyone else who works hard for a living, postpone from
year to year that moment when they feel that they can say, with a sigh of
satisfaction, “Now my pile is big enough. I can stop and do whatever I
want”.
This friend is still educating his children - one reason why many of us
postpone personal desires - but now he is even asking himself what his
children's education will prove to be for. Will they want to pursue a career
in finance like his? Absolutely not.
And we are all being told that there is worse to come. The mood at Merrill
Lynch is one of palpable relief; they are out of the front line. But other
banking and insurance giants are tottering and may not withstand the
continuing turmoil; thousands of smaller fry are on the brink. London's new
unemployed are now leaving their offices, hunched over cardboard file boxes
containing the pathetic clutter that is deemed personal.
One single mother I know - an American lawyer - took less than 24 hours to
gather financial advice from her circle of well-
informed City friends and move her UK cash into gilts, her US cash into
Treasuries, her stock market holdings out of institutional titles and into
her own name. There are plenty of e-mails circulating that advise friends to
buy physical gold and silver; oil, gas and copper; notes of banks that
cannot be allowed to fail; currency. Dump the US dollars as quick as you
can. This kind of detailed advice makes plenty of people feel panicky.
Moving assets fast means accepting the status quo and probably realising big
losses. “Realise” is a good word. Most of us need to linger in disbelief for
a while, or at least mull over what has happened.
Wives who don't work in the City, or don't work at all, are in a tense waiting
game. They may have long ago ceded the management - and even understanding -
of investments to their husbands, but by now they have examined and
re-examined the lists in newspapers and on the internet of banks reported to
be in the biggest trouble. Maybe they have allowed their hearts to flutter
with guarded hope when they see that their spouse's bank isn't on one, or
isn't near the top. But they know that the stock price is way down, that the
options can't be shed. They also know that Lehman has countless
counterparties in every commitment it made.
They know that the trouble has to spread. They take some comfort from thinking
“we're all in this together”, and are made passive by musing that there is
nothing they can do anyway. The institutions are monoliths; the size of the
problem is overwhelming. The only real response they can make is
psychological adjustment - that is their job for this autumn. Some may fail
to do this. A few years ago I heard a Notting Hill mother of four confiding
to a friend at a cocktail party that if her financier husband couldn't get
her an apartment in the most sought-after part of their building in
Manhattan, instead of the less fashionable section, she was going to dump
him.
Status-crazed babes may as well seek rich prey outside the world of investment
banking, hedge funds, and perhaps finance altogether. Far from planning to
walk out on their husbands for letting them down (where would they find
another husband doing better just now? If they had wanted a divorce, the
right time was last spring when there were still assets), wives will now
close ranks. They are thinking about how they will do right by their
children without the resources they have long had at their command, and
which they expected would grow bigger.
Even as they hope they won't have to, they are making plans to economise. City
wives are tougher and more practical than a lot of people realise. They are
not celebrities. They are managers - plenty of them once worked in the City
themselves. Economy also means home management, and already they will be
preparing for some very tough cuts, though not all their decisions will make
sense to outsiders.
Which holiday should they cancel first? Skiing, because it's the shortest,
coldest and most expensive. How soon can they get out from under the lease
on the country house - or, if the penalties for breaking it are too great,
should they spend all their holidays there while the lease lasts?
Who can they let go from the staff? Most would rather do without the nanny
than without the cleaner. With any luck the cleaner likes children anyway
and will help out in a pinch. If there is a cook, she goes before the nanny.
The cleaner also knows how to roast a chicken and wash up. Forget the garden
altogether - expect to see a lot of weeds as the crisis worsens - although
the unemployed may take some comfort in doing the gardening themselves.
Shopping ... they have been meaning to cut down on shopping for years.
Haircuts, though, they can't do without.
Experienced soldiers can hold their ground under a hail of fire, raw recruits
will break and run. I know of one talented young man, educated at the best
private schools and a fine university, who spent his first working year at
Lehman Brothers. After he emptied his desk on Monday, he broke and ran as
only the young know how - straight for the pub. Did he know that's where the
recruitment agents are now conducting business?
I feel sorriest for those City workers in their thirties or forties, who are
still driven and ambitious, who have not yet had their turn to run the show
or accumulate a decent-sized pile, and have young families. Families with
young children cannot make adjustments quickly.
Where do you go, to whom do you turn, when suddenly you have nothing? So many
of us are hoping that we won't have to face that question. But we should
also hope that we will see some courage, calmness, and maybe even a little
self-sacrifice - like the generations who raised us on far less material
wealth than we have now. Isn't it time that we ate more leftovers, wore
hand-me-down clothes, drove our cars a few years longer, gave our neighbours
a lift, played cards or a game of catch with our children?
Friends who lent us a sofa four years ago because they were buying all new
furniture have asked for it back. They have been building a mansion in the
country; luckily for them, it was completed before the current troubles. But
it seems that they can't afford to furnish it. It is not the ideal moment
for me to buy a new sofa, so at our house a few people will be sitting on
the floor.
Yes, I am already looking for a silver lining. I am painfully aware of how
grossly America out-consumes the rest of the world, and feel guilty about
this even though I have lived in Britain for nearly 25 years. When Al Gore
first circled the globe, advising us to change our ways before we burnt up
the planet, I wondered why people couldn't commit to a stricter regime. I
gave up blow-drying my hair for a whole year. Yet we have gone on having not
only more than our share, but more than we could pay for.
How did we become so undisciplined? What allowed us to go on saying to
ourselves “you deserve it” when we knew full well that people elsewhere were
ill or starving or working in sweatshops? Well, now it's time for the
guillotine. It's time for the chop. The worst of it is that those who will
suffer most probably had least hand in creating the mess.
But perhaps we will all rediscover some of the kinds of wealth that cannot be
measured in monetary terms. If this is our Great Crash, we will need to draw
on the strengths we often attribute to our parents and grandparents to get
us through.
Tanya Byron: Helping the mighty who fall
There has been a lot of research into the impact of unemployment on mental
health, and it shows that up to 40 per cent of unemployed people suffer some
sort of psychological distress, ranging from insomnia and mild anxiety to
clinical depression. This demonstrates that unemployment causes poor
psychological health, rather than resulting from it.
In this crisis, where the numbers are so large and the unemployment was
sudden, some psychologically healthy people will be affected, and their
mental health will suffer.
Cases can be severe. I once saw a woman whose husband had hanged himself after
he was made unemployed. He was a sane, rational, bright young man with no
history of mental illness. But employment does not just provide money - a
job underpins who you are and gives you an identity. When that goes, life
can feel helpless. This husband wrote his wife a suicide note in which he
said that he was of no use to her, that she was better off without him.
Most cases are not so extreme, but employment is part of the social fabric of
all our lives. It offers a structure to our day, it enables interaction and
relationships outside our family, it enforces activity, and - especially at
the level of a high-flying banker - it offers a feeling of power and status.
Research on the impact of unemployment on families shows that there is often a
big impact on children. Their schoolwork suffers; they can become withdrawn
or difficult.
The impact on a child depends on his or her age. It is always important to be
as honest as one can, while focusing on the certainties of the future as
much as possible, and highlighting the positives. For example, if Daddy is
going to be at home more often, that means Daddy can do the school
collection run. If the child is older, parents need to offer reassurance
that they will be included in the decisions for the future. But for children
of all ages, a parent should make clear what has been lost and what will
remain the same.
For wives - and I have seen this a lot among upper-middle-class women who
belong to the type of nuclear traditional families that many of those who
worked at Lehman Brothers will have built - there is often anger. Many feel
that they have built a reciprocal partnership with their husband. He is more
than a father, friend and lover, he is also their business partner. But he
has let the side down. One wife said to me that she felt her recently
unemployed banker husband had turned into her third child. She was angry
with him and he felt unsupported by her, and so the complication begins.
If a family is functioning well, is strong, and its members have built a good
relationship founded on more than money and status, they will cope well with
the lifestyle changes that accompany the sudden loss of a job.
Losing your job is like a bereavement; there will be a period of mourning.
People panic - and they need to implement a strategy as soon as possible.
Doubtless a higher rate of unemployment will be accompanied by increased
activity in the financial counselling sector, whereby families can be taught
to construct short, medium and long-term contingency plans.
If nothing else, this enforces a sense of normality, continuation and control
- which is vital when you feel that you have lost everything else.
