|
Written by José D. Roncal
|
|
Thursday, 17 September 2009 00:13 |
While there are signs that the global economic meltdown has hit bottom with a few faint glimmers of recovery on the horizon, the rules have already changed.
Let's do a quick review the events of the past year. First there was the government takeover of Fannie Mae and Freddie Mac back in September, followed closely by the collapse of Lehman Brothers. That was enough to touch off a panic that ricocheted around the globe. Next came government intervention and stimulus packages that poured vast sums of money into the craters of the financial system.
But the over borrowing and loose money that had fueled the 80s boom has dried up. The global economy had been feeding off that expanding credit, and now cheap credit is gone, and so is the era of reckless consumer spending.
There will be a lot less willingness to take risks for at least the next decade or two and certainly less access to credit. All those consumers we wrote about in our reportConsumer Debt in the U.S. are now socking their money away or paying down debt.
That consumers are reluctant to spend what they don't have is evident in the numbers. According to recent 2009 reports from the Fed's, consumer credit fell at an annual rate of 5.2% between April and June, after falling by just 3.6% between January and March. Revolving lines of credit, including credit cards were also decreasing -- 8.9% down in the first quarter and 8.2% in the second quarter.
Rising unemployment rates play a role in the decline in spending and even the banks have become tight-fisted as they try to build up reserves. If you need a loan, you're probably out of luck. Many U.S. banks don't have the ability to lend, including the more than 400 banks that are on a "problem list" and at risk of insolvency. Eighty-one banks and thrifts have already been shut down and the FDIC notes that escalating loan losses has depleted bank reserves with the ratio of reserves to bad loans at 63.5%, the worst since 1991 during the savings and loan debacle.
Part of the problem has been the way banks have handled their loans. As far back as the 1980s, banks have kept loans off their balance sheets by selling them into a secondary market where they were bundled and sold to investors as securities. Last month we wrote about this inSecuritization: The Good the Bad and the Ugly. All manner of debt was packaged and sold, from home mortgages and car loans, to student loans and credit cards.
|
|
Read more...
|
|
|
Written by José D. Roncal
|
|
Tuesday, 01 September 2009 02:55 |
In our book, The Big Gamble: Are You Investing or Speculating, we ran a red flag up the pole with a warning about putting your money into so-called investments that are actually nothing more than speculation. Along with plenty of historical examples of investments that went south, we also drew comparisons between speculation and gambling. But in each case, we were always referring to the decisions and mistakes you make with your own money.
Let's assume you gambled and lost. If you learned from your mistakes, maybe you'd establish some rules and avoid making the same errors in the future. But what if you lost money because of somebody else's gamble? That's a situation that requires a different set of rules. And that's the situation that our federal regulatory bodies are facing today, because somebody else DID gamble and lose . . .and you are paying for it . . .big time.
We all know that the collapse of the housing market started a domino effect that brought down the economy and created a global credit crisis. The problem was magnified by the sale of complicated investments that Warren Buffett once called "financial weapons of mass destruction." These weapons are known as credit derivatives or credit default swaps. We reported on that fiasco last fall in our article entitledWall Street's Shadow Market.
Just to refresh: Credit default swaps and derivatives are essentially complicated and convoluted financial instruments whose value is based on something else entirely. In this case, they were side bets on the performance of the U.S. mortgage markets. The players were betting on whether people would default on their mortgages. And like an office football pool where you don't own the team you bet on, major financial institutions were wagering on financial outcomes of securities without ever having to buy the underlying assets.
|
|
Read more...
|
|
|
|
|
|
