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Published: Tuesday, 9/16/2008

Market crises may be good in long run

Early yesterday morning, financial commentators on TV were wringing their hands and gnashing their teeth over the latest Wall Street crisis the bankruptcy of Lehman Brothers Holdings, the sale of Merrill Lynch & Co. to Bank of America, and the pressing need for insurance giant American International Group to raise $10 billion in new capital.

And sure enough, it was a very rocky day in the stock market. The Dow Jones industrial average fell 504 points, or more than 4 percent.

I couldn t help but think about my late mother-in-law, Betty, who late in her life often gave good advice to younger people in times of adversity. Things work out for the best, even if you don t know it at the time, she said, even in the darkest of days. And she was right.

Despite the plunge in stock prices, it was healthy to bring the financial industry s lingering sickness to the critical stage. Now, the debacle has everybody s attention, including the Federal Reserve and other regulators. It s far better to deal with this problem now rather than letting it drag the market down little by little for many months.

It s also healthy for banks and brokerages to get the message they could be allowed to fail, without government intervention.

And it s healthy for investors, regulators, and Congress to consider whether the financial markets need tighter governance in the future. It s good for regulators to look at capital requirements, and it s probably a good thing that big financial companies are combining, to gain more strength.

In recent months, American investors and consumers have had to deal with a glut of bad news: soaring oil and gasoline prices, falling home values, and a credit crunch. All of those crises could lead to better outcomes in the future.

For example, crude oil is down 35 percent from its peak of more than $147 a barrel at least partly because motorists finally started to cut down on gasoline consumption.

And that s very healthy. Conservation will do far more good in the short run than drilling new oil wells, switching to smaller cars, or investing in power-generating windmills or ethanol plants.

Crude oil closed yesterday down $5.47 a barrel, at $95.71 its first close below $100 in six months.

A slippage in home values is not entirely bad, either. That forces homeowners to quit counting homes as their primary investment for the future. A home is an important piece of a financial plan, for sure, but stocks, bonds, and savings are now looking better to many folks.

The credit crunch is a problem for million of consumers right now. But the end result could be a healthy belt-tightening. Many will be forced to curtail their appetite for credit, and, by living within their means, will improve their finances.

While the banking crisis has been hard on many homeowners and borrowers, it s good that the industry has to reconsider its practices. Every time banks lower their lending standards, they get burned, going back to the savings and loan failures of the late 1980s and early 1990s.

Right now, many Americans are angry at what s happened on Wall Street and on Main Street. And even anger can be a good thing, if it makes us think twice before getting into another mess in the future.

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