| It has been said many times that we are sinking into a new global Great Depression, that the world will fall into financial dark times for many years to come, and our very own livelihood will change because of greed and corruption in the US markets. You probably have heard this already. But is it true?
Yes and No.
Yes we are headed into a difficult time financially, but it is not as bad as you think. I am always amazed at how easily we forget other financial crisis in the event of a new one. I would like to remind you that during the Great Depression banks lost the life saving of millions of costumers, that unemployment rate was soaring at nearly 25% in the U.S, and that millions of jobs were lost during the whole ordeal. We are not nearly there.
Still, we are in for a very tough ride.
So how did this whole mess get started in the first place? That is a great question. One that most people would like to (and some actually do) summarize into a single sentence. Wallstreet did it. The real estate crash did it. Minorities did it. The republicans did it. Election Year did it. I have seen it get blamed on China, Russia, Iran, Iraq, Afghanistan, and every country the U.S has a military presence in. The truth of the matter is none of these reasons are to blame. Surprised? Don’t be. The main cause of this mess is nothing else than the main reason countries, communities and every single organization gets into problems. Human Nature.
Greed is such a moving factor in our world that you would be hard pressed to imagine a world without it. It is what drives economies, builds companies, and ultimately presses us on to make more money every time we can. In doing so we stimulate growth of our capital and in turn the economy grows. Uncle Sam takes away more and countries prosper. Greed is indeed the motor of our economy. So why did it all go wrong?
It is human nature to always want more, whether it is for us, for our families, or our community. Unfortunately the simple economic model I stated before could not cope with us wanting more than we could have, better stated, it could not cope with a system that gave us more than we really could have. And that is where it all went wrong.
By and large, the problem with lending was that independent, unregulated brokers pushed inappropriate loans to poor borrowers and to many American middle-class and wealthy consumers who could not qualify for their second or third vacation home and who took a "liar's loan" from brokers. These loans were then sliced and diced into mortgage-backed securities by Wall Street investment houses that then sold them to the financial institutions of the world.
The Wall Streeters often used shaky accounting schemes to buy the loans from brokers who were not regulated by anyone. These brokers took their generous commissions and ran. Like the first people to cash out of a pyramid scheme, the brokers were out of the picture before they could be held accountable for fraud, misrepresentation or other coercive tactics they used to sell the bad loans.
A crisis arose from a perfect storm: There was the loose-money era created by low interest rates set by then-Fed Chairman Alan Greenspan and a burgeoning, unregulated financial sector. Then we saw the integration of financial systems around the world.
So what should you do about all this mess? The best thing you can do is get rid of your personal bad debt (all that toxic debt) like credit cards. And please disregard every single ad and publicity stunt to get you more into debt, a new 0% interest credit card or a new mortgage are not going to bail you out! Once you have paid them, however, do not cancel your credit cards. That will only hurt your credit rating and will leave you literally broke in case of an emergency. This will be your exit plan; it is always great to have an exit plan.
Keep investing. Yes that is correct, keep investing. Are you still with me? Good now let me explain. The current state of the markets is one of disarray and lack of information. No one really knows how much they will lose, so they will continue cashing out of risky options and continue a more conservative approach. When all of this speculation is over, everyone will know how much they will lose, they will realize it is not as much as they thought, and will begin trading again. By continuing investing and diversifying your portfolio you are forcing yourself to buy low, that way when the market bounces back you will be at the front of the pack. Also try to have cash ready, no not stuffed in a pillow, just in a checking account preferably backed by some form of government regulating institution.
We have always wondered what it would be like to go through some of the epochal events we read in the history books. Well this is it. This financial crisis is being compared to the some of the worse in history. There are many ways to come out of this on top. The government has many tools at their disposal to curve the lasting effects of an event like this one. Credits will be hard to come by and certainly the risk of any project without the proper leverage will be difficult to make a reality. There are however other types of financing, like joint ventures. Joint Ventures help share the risk involved in the project, and can be very cost effective in the long run. In the mean time, buckle up and sit down comfortably after you have arranged your portfolio, because it is going to be a crazy couple of weeks.
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