Almost everyone is searching for someone to blame for the current economic crisis. The problem is, most of the people looking to point the finger, are actually the ones who should be looking in the mirror when it comes to who is really at fault. Unfortunately, the American consumers put themselves in this situation through a combination of greed and lack of personal financial knowledge. Sure, greedy corporations and lending institutions played a role as well, especially if they deceived unwitting borrowers, but there again, the key word is “unwitting”. Buyer beware is still the mantra, even when it comes to purchasing a home.
Monthly Archives: October 2008
Because the financial meltdown has happened so close to a presidential election, the partisan spin-masters are working overtime to capture the public’s perception of who is to blame. The Democrats are blaming the Republicans for de-regulation. The Republicans are blaming the Democrats for propping up failing government-sponsored programs. The mortgage industry is blaming consumers for making poor financial decisions. The consumers are blaming the mortgage companies for issuing loans that could not be maintained.
The headlines scream it loud and clear: “Greatest Financial Crisis Since the Great Depression,” “Severe Recession Looming,” “Retirement Savings Wiped Out.” Government bailouts and partial nationalizing of our banking system have resulted, thus impinging on the great American laissez-faire capitalistic experiment.
Clearly, something in our financial system went very wrong or we wouldn’t be in this precarious predicament. That something is the result of two historic economic bubbles within one decade; unprecedented in American history.
In turbulent times like these, it is important to make sure that the companies you are investing in are financially stable. One way to determine this is by looking at the company’s balance sheet and comparing the amount of debt they have with the amount of cash they have. If a company has a lot of cash and little debt, they will have more opportunities and provide more stability to shareholders than less fortunate companies who have little cash and a lot of debt.
According to the President, Congress, independent financial experts, and TV pundits, this week’s economic picture for the country is the worst seen since the Great Depression. It can be argued that Warren Buffet is the richest man in the United States, turning over his capital to the Bill and Melinda Gates Foundation for philanthropic purposes notwithstanding.
The world is now focused on the state of the American economy and more specifically, on Wall Street. America’s current crisis is the ultimate trickle down, economic theory. The housing meltdown created solvency issues, within the banking industry, when borrowers defaulted on mortgages. The construction industry continued to borrow to build more housing, leaving a glut in unsold properties and a further insolvency issue in the construction side. Many of these mortgages were underwritten by insurers who bet (and lost) that the mortgages would go to term and not enter bankruptcy proceedings. Wall Street firms bet on bundled packages of mortgages that were traded as if they were commodities, hoping for exorbitant profits on ARM (Adjustable Rate Mortgages) and Sub Prime Loans. Mutual funds bought into firms that touted profit margins that simply weren’t there or sometimes, allegedly, were fraudulently promoted. Investors, fearing the aforementioned insolvencies, withdrew millions from affected firms reducing working capital and liquidity and thereby hastened the downfall.