Will Y2K Spark a Worldwide SOS? - how the Year 2000 computer problem could affect personal finance

Kiplinger's Personal Finance Magazine, Jan, 1999 by Ann Reilly Dowd, James Ramage

With a year to go, the experts aren't Willing to offer a reassuring "no."

In The Day the Earth Stood Still, the 1951 sci-fi thriller, an alien invader brazenly turns off the earth's power, bringing the industrial world to a terrifying halt. Lights flicker off. Phones go dead. Trolleys stop in their tracks. Pandemonium reigns from New York City to Tokyo.

Half a century later, doomsayers would have you believe an Information Age sequel is on the way. Only this time the alien is the millennium bug, a programming glitch that will cause some computers and products with computer chips to shut down or spaz out when they think the "00" in a date means they're back in the McKinley administration in 1900.

Could it really happen? Could the earth stand still?

"I think not," is the less-than-100%-reassuring answer from White House year 2000 czar John Koskinen, who has been spearheading an administration assessment of the risks ahead. "The problem is that no one really knows. While the big American companies are working on it, there is still great risk in some foreign countries and parts of the U.S. of serious disruptions if we can't get people to address the problem in time."

Call it the revenge of the nerds. Some 50 years ago, when early computer programmers designed hardware and software and chips, they used only the last two digits of each year in order to save memory and money. So, when the clock strikes one second past midnight next year, many date-sensitive programs will read the "00" as 1900 instead of 2000, causing them to stop or malfunction. Because such systems are integral to everything from personal computers to lifesaving medical devices to the air-traffic control system, the Information Age could grind to a screeching halt.

The good news is that most major U.S. companies have long been keenly aware of the need to eradicate this bug and are working feverishly to prepare themselves for a seamless transition to the next century. The bad news is that many small U.S. companies--and foreign firms and governments--are so far behind that some system failures are virtually inevitable. Considering our reliance on global computer networks, no one is absolutely sure to what extent the weak links could break the chain--and wreak havoc with the economy, financial markets and life as we know it. Deutsche Bank Securities chief economist Edward Yardeni thinks there's a 60% chance that Y2K (shorthand for year 2000) problems will plunge us into a global recession as deep as the 1973-74 downturn that sent the Dow Jones industrial average down 42%.

With 12 months to go, the best bet is that the doomsayers will be disappointed. But while you don't need to pack your pickup for that survival camp in Montana, there will almost surely be unforeseen breakdowns that could bankrupt some companies, rattle markets and disrupt daily life, at least temporarily. Here's a practical guide to help you navigate around the hype and hysteria and protect yourself against the real risks ahead.

BANKING

It's January 1, 2000. Is your money safe?

Yes, but that doesn't mean we'll all be able to get at our cash with equal ease. Regulators say nearly 95% of federally insured institutions are making "satisfactory progress" in readying their computers for the year 2000. But that leaves more than 500 mostly small institutions in need of improvement and 37 dangerously behind. If your bank is one of the few that misses the deadline, your transactions could be incorrectly debited or credited. And if the bank is part of an ATM network, it could infect the entire system, causing temporary ATM errors or outages even for customers of well-prepared institutions.

If your money is in a small bank, thrift or credit union, ask officials if their computers will be ready for the millennium. If not, consider switching to one of the large banks, most of which have been working long and hard to fix the problem. In any case, paper records will take on added importance near the end of this year and for the first few months of 2000. Plan to hold on to your statements, just in case computer records get lost or corrupted. And although most ATMs and credit cards should work just fine, it might be wise to keep a little extra cash around. The Federal Reserve will have an extra $50 billion cash--14% more than usual--on hand at the end of 1999 for just that reason.

INVESTMENTS

Bull market, bear market. Will there be a market?

Not to worry. The securities industry, including the major exchanges, is far ahead of most industries in ensuring that its computer networks are up to snuff. The major mutual fund companies, including Fidelity, T. Rowe Price and Vanguard, say they will have fixed their in-house systems by this February, as do major brokers such as Merrill Lynch and Charles Schwab. A reassuring sign of progress: A four-day industrywide test last September found no Y2K glitches that prevented trades.

If there is a problem, it's likely to be with small brokers or systems outside the industry's control. Says John Panchery, the Securities Industry Association's year 2000 expert: "The things that scare us most are problems over which we have no control, like outside data feeds, phones, elevators and utilities."