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.
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The first bubble started in the mid-1990s when personal computers and improved telecommunications gave rise to the Internet and the World Wide Web. Working in the information technology industry as a technical writer at the time, my coworkers and I were astounded at the amazing stories of companies desperate for tech workers recruiting college students even before they graduated. And on top of that, paying them $70K per year, huge signing bonuses, paid travel for interviews, mortgage and relocation assistance, and even brand new cars!
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Unfortunately, the great tech boom lasted only five short years and came to a grinding halt in March 2000 amidst talk of “irrational exuberance” and vastly overvalued stock prices. Suddenly, talk of paper millionaires, second homes, and lavish annual company parties was drowned out by cutbacks and mass layoffs. The stock market tumbled, employee stock options and stock purchase plans evaporated, and many tech jobs simply vanished.
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Around that same time, a nascent housing bubble was beginning to form due to the vast wealth created by the tech bubble. Circa mid-2001, stories of multiple bidders offering $10-$20,000 above the asking price of the home surfaced. Deregulation of financial markets and lax oversight created a new atmosphere of “anything goes,” and banks loosened their lending requirements to allow a greater number of homebuyers to purchase a home.
Subprime lending, or lending to those whose credit scores were too low, became widespread. Also gaining in popularity was “creative financing,” designed to meet the needs of average borrowers who found housing prices simply too high. The words of the day became, “zero-down,” “interest-only,” and “fast-rising equity will cover your higher mortgage in the next few years.” It wasn’t very long before lending became so lax that prospective homebuyers no longer had to prove their income; and nobody bothered to check.
By late 2007, signs of cracks in the system became too numerous to sweep under the carpet. Banks became burdened by the sheer numbers of risky loans they took on. Subprime lenders fell, and creative financing largely became a thing of the past. Loans became harder to come by; foreclosures began to mount; home prices began to fall; and the American Dream quickly became an American nightmare for many as they found themselves upside-down in their mortgages, owing more than their home is worth.
Just like the tech bubble of the mid-to-late 1990s, irrational exuberance, fear, and greed gripped the American financial system during the massive housing bubble of the first decade of the 21st century.
But who is at fault? Shady real estate professionals who pushed bad loans on unsuspecting homebuyers? Financial institutions who developed the very “creative financing” vehicles that led to the historic housing crash? Or Joe Q. Public, who knew in his heart that he couldn’t possibly purchase a $600,000 home with zero down for only $1400 per month in perpetuity?
Perhaps the fault lies in governmental policies of deregulation, absent oversight, and unrestricted free-market capitalism leading to the deceptive appearance of flush times that would continue unabated for the foreseeable future. Perhaps the practice of the repackaging and purchasing of risky mortgages amongst banks is to blame. Or maybe it’s the average Joe, who knows he can’t afford such a large home but feels enormous social pressure to “keep up with the Joneses.”
So who is really to blame for today’s financial crisis? Who should we hold accountable for the trillions of dollars lost from our stocks, retirement accounts, and mutual funds? The truth of the matter is, there’s plenty of blame to go around: legislators, regulators, Fannie Mae, Freddie Mac, mortgage industry, home building industry, Wall Street, credit rating entities and housing speculators.
If your portfolio or 401K has been hurt by the housing bubble / financial crisis, you might consider managing the risk of your investments using stock options. At PowerOptions, we specialize in giving our customers the necessary tools and education to better manage their stock investments. For example, some of our customers have actually made money during this crisis by investing in bearish stock options strategies found using our stock options search tools. Additionally, some of our customers have protected their investments by deploying protective strategies via put options, for example. We’ve provided an entertaining look at the housing bubble /financial crisis, which can be viewed via this link: digg.com/business_finance/Who_s_to_blame_for_the_housing_bubble_credit_crisis, and if you enjoy the video, please give us a “digg”.
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