The recent economic crisis is a toxic cocktail of immense proportions. Understanding what to do next is impossible without first understanding the individual ingredients in the cocktail. To be sure, each of these ingredients requires a fully-orbed separate treatment for proper analysis of individual situations. Let's stipulate to this fact now. Knowing the ingredients, however, will go a long way in getting off on the right foot for future analysis and problem solving. Here are five ingredients.
First, Congress in 1977 compelled banks to lend money to people with unworthy credit. This was the Community Reinvestment Act of 1977. In the intervening years, any congressional suggestion that this might be a bad idea was met with social ridicule. We now call these acts of congress "subprime mortgages."
Over the last several years, secondly, bank regulators essentially took a long vacation. Everyone knew that these loans were carried on the books at questionable values. Then suddenly, the regulators asked that these investments be "marked to the market." In short, banks were then forced to carry these assets as if they were a fire sale today instead of a long-term investment for tomorrow. This scenario ignores the sort of assets that were carried off the books, which is extra trouble.
Third, the Federal Reserve over the last several years kept interest rates at historically low levels. The easy access to money meant that more money was loaned. Easier money supply meant that more money chased each individual piece of real estate. This is a classic prescription for inflation of any asset. So real estate, accordingly, rose at a rapid and unsustainable level.
Americans do not save money. This is number four, but it might need to be number one. Instead, they borrow for everything. The average credit card balances and average mortgage to equity ratios grew exponentially. People borrowed much more than they were able to reasonably repay.
Finally, in 1999 the Glass-Steagal Act deactivated. This meant that deposit based commercial banks and leveraged based investment banks no longer maintained a wall of separation. In short, banks leveraged themselves at a 40 to 1 ratio. For every dollar of capital, many investment banks borrowed forty dollars. They then bought what they thought was $40 of value to only see the asset value abruptly erode. This is a prescription for bankruptcy for any organization.
The big picture of this toxic cocktail is stunning and few saw it coming. This brief summary intentionally provides no offered solutions. It is critical, however, to see that everybody is complicit in our current economic crisis. Individuals borrowed too much money. Banks over-leveraged and ignored risk. Regulators looked the other way in one instance, then suddenly changed the rules in the next. The Federal Reserve made money too easily available. Congress mandated bad loans on the one hand, then deregulated the handling of those loans on the other.
Although there are no easy answers, we need to look carefully at the individual ingredients as well as how those ingredients combine to create the unintended consequence of the worst economic crisis in modern history.
For further information concerning investing, pensions or retirement planning read Steve Meidahl's well-regarded book, "Lessons of A Real Life Investment Advisor" or visit Stephen O Meidahl's website at http://www.smeidahl.com
Article Source: http://EzineArticles.com/?expert=Stephen_Meidahl
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