Updated: May 3, 2013 12:14PM
If you're just waking up -- or didn't sleep at all last night -- because of the financial headlines, you have every right to be a little scared. But you shouldn't panic! There's a deep "safety net" that protects your bank deposits and securities accounts from the failure of a financial institution, though not from your own investment mistakes.
Still, a 500-plus point drop in the stock market, and scary headlines about brokerage failures, insurance company woes, and legendary names like Merrill Lynch being taken over, means you have every right to be a little queasy. Our financial system is purging a decade of excesses, in which financial alchemy turned bad loans into paper that was rated and sold as a "good investment."
There is every reason to believe that our financial system will emerge from this crisis strengthened -- after purging its excesses. But that resolution will take time and involve painful losses for financial firms that were were overextended or over-leveraged. And it will destroy retirement dreams for employees of those firms.
The illusion that wealth could be created out of debt will die hard -- not only on Wall Street, but in every American home. Facing reality will be equally painful for those who are still heavily in debt -- whether to credit card companies or on mortgages.
Our system will survive, but our lifestyles will change. America will still remain the land of opportunity -- but we will all have learned that you can't finance opportunity on a credit card, or on the house!
This is not the end of our financial system, only the beginning of change. We now understand the definition of risk. There are consequences for our actions.
Former Fed Chairman Paul Volcker, who presided over our last great crisis -- the inflation of the late '70s -- told me Monday: "I've been around and I've seen crises come and go. This is a big one, and a complex one, but it is not beyond our ability to make corrections."
The government will be part of the solution -- but the taxpayers cannot be asked to rescue Wall Street tycoons whose stock prices have melted down, any more than they can rescue individual homeowners who are facing foreclosure. Our government can only help create a new structure that gives the system a way to grow out of its past excesses.
Even more important, America's giant economy gives us the confidence on which our financial system is based. We make real things in America -- grow real crops, build real businesses, and we innovate through technology. We are far more diverse than our financial institutions, which gave the illusion of creating wealth. The real America will use its real resources to create more wealth. And that's the Savage Truth.
For more on the crisis, visit my blog: blogs.suntimes.com/savage
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate. Copyright Terry Savage Productions Ltd.