How Did We Get to This Point?
Like most people in the industry, I've been keeping a close eye on the volatility of the market. This includes keeping up with the musical chairs status of the financial institutions. We've seen runs, purchases, insolvencies and bankruptcies. We've also seen the end of the investment banks.
Seriously- who saw this coming?
Now the Treasury and the Fed are making their case for the largest bailout in history. Optimists will tell you this is what is needed to avoid a recession. Pessimists will tell you that, should the bailout fail, we could see conditions that will stifle the entire world economy.
Truth normally finds it's way to the middle. It's called a tendency toward the mean. It's not my purpose in this post to relate what will happen. It's too early for that. Though there is a proposal- there's not a complete approval... next comes action on the approval. At that point the picture may begin to grow more clear.
Until then, let's spend time on this topic: How did we arrive at this point?
One of the better articles I've read is from, Fred Frailey; he's the Editor of Kiplinger's Personal Finance. It's called "15 Things You Need to Know About the Panic of 2008."
He has charted the breakdown... and the caveats of the decision making involved in the modern economic crisis.
It's a very good read. In summary:
- Cheap money was available and financial institutions, and global players, treated housing loans as solid investments.
- As prices slipped the big discovery occurred... loans devalued, prices slid, every financial institution scrambled to maintain liquidity and keep clients.
- Investors withdrew funds from any institution that appeared to be troubled.
- Institutions tightened credit and governmental agencies swooped in to curb the collapse of larger players.
- The market is on a teeter-totter. Some are encouraged by what they see in the market while others are skeptical. We'll probably see the after-effects of this market for quite a while.
These are the things I'm looking for:
- Is the government's plan the right plan? Right now there's a debate over that. One large facet to this debate is whether the government is acting too quickly or not quickly enough. If the rescue is worse than the condition that is being treated the after-effects could be harsh. If there is too much inaction the market could stagnate.
- Will the market be turned over to an entity that has too much power? Strict constitutionalists contend that the government is overstepping its bounds. There is a separation of powers that prevent the executive, legislative and judicial departments from gaining too much influence over the nation. A very small group may be granted decision making powers that the constitution does not seem to provide. Some feel that certain measures may be taken that will cause us to wonder if we really are based on a free market system.
- What would the Presidential candidates do? There is no doubt that either candidate will react differently to the financial crisis. I'm intently interested in their approach. It will be the single largest issue upon which I'll base my voting decision.
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Chuck Willman is a real estate agent and founder of AZvest, a group of investment-minded individuals who specialize in real estate in and around the Phoenix metro area.
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photo credit: "New US Dollar in Circulation" - http://www.fun2fun.info/new-us-dollar-in-circulation.html
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