Financial Markets in Trouble – Who’s to Blame?

April 1, 2008

The markets are dragging down the economy …. Giant institutions are, to use the technical term, scared to death.

I wish it was an April Fools joke but unfortunately it’s all too real.  Alan Sloan from Fortune magazine has a good overview of how the current financial mess came about and what the impacts might be on you and I.

“We’re suffering the aftereffects of the collapse of a Tinker Bell financial market, one that depended heavily on borrowed money that has now vanished like pixie dust. “

Hedge funds and investment banks broke one of the vital rules of investing; don’t put your money into an investment unless you understand how it works.  According to Sloan, “ they created, bought, and sold, for huge profits, securities that almost no one understood”.  These institutions were repackaging and reselling debt multiple times over which made it difficult to understand how much risk there really was.

I remember reading a book several years ago, How to Profit from the Coming Real Estate Bust, that described how investment banks would buy a bunch of questionable auto loans, bundle them up, slap a quality credit rating on them and sell them as AA debt.  Of course, I’m simplifying the process but that’s what it amounted to. The author of the book, John Rubino, stressed the danger of the practice and foretold a huge financial mess.  Sounds like he was right.

Sloan then goes on to talk about the government’s role in bailing out these banks, why they’re doing it, and who will pay for it.

“Say the Fed extends $500 billion of emergency loans to firms in need of short-term money. They’re paying around 2.5% interest to Uncle Ben (or Uncle Sam, if you prefer). That rate is way below what they’d pay to borrow in the open market, if they could borrow. The difference between the open-market price and 2.5% is a gift from us, the taxpayers.”

He thinks the markets will eventually stabilize but the costs of the financial mess will be long lasting and far reaching:

  • income on our Treasury bills, money market funds, and CDs has dropped sharply
  • our wealth has eroded relative to foreign currencies and commodities
  • a loss of faith in the dollar by our foreign creditors
  • run up the price of commodities that are priced in dollars
  • our financial institutions will emerge from this episode weakened

The bottom line is that this economic mess is not going away any time soon and those of us that have been responsible with our own personal finances are going to suffer for it.

“It’s going to take years to work out our country’s excess borrowings, with lenders and borrowers – and quite likely American taxpayers all bearing the cost.”

Doesn’t it make you feel great about paying your taxes here in the next few weeks?  Too bad we can’t earmark our income tax payments as “not to be used to bail out the rich, irresponsible investment bankers”.

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Ben

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Ben
Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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4 Responses to Financial Markets in Trouble – Who’s to Blame?

  • Very secret

    Just to fill you in on the collapse and what caused it It is this simple…..Realtors,
    teamed up with broker/lenders who team up with wallstreet to all make a happy big commission. These people should be put in jail as eventually had to know
    what would happen… Solution to the problem (Make realtors and brokers pay back commissions recieved) (Oh and wallstreet.) on Any house that foreclosed because of fraudulent acts such as trying to get a loan to go thru for a commission
    when there was an inability to afford the loan and the broker knew, the lenders knew, and the realtors knew the loans would fail. These parasites caused our
    country to nearly collapse and while hard working real people starve and lose their homes while the big shots pad thier pockets with dishonest money…If I steal hundreds of thousands of dollars I go to jail therefore take the 780 billion
    and build jails for the crooks do away with realtors, brokers, and wall street. and give the retirement accounts back to those whom lost money. I
    will say I worked in a brokers office and I know what caused this, however, knowing of all the wrong doings after three months I removed myself from the position. I am thankful I got out as I would not want to be responsible for the
    things that have been done wrong…..(phony W2s) Phony jobs and anything to
    make the loan go through….So while we’ve all sat back and lost our 401Ks the
    rich keep getting richer stealing from the poor…..Hope you can see the truth too.
    It is not one banks fault or one person it is millions of them. When people learn to listen to honest poor people they will learn the truth, and have a solution

  • Ben

    Lily, good point, every industry has it’s chiefs who make most of the money and the grunts who do most of the work.

    I don’t wish losing a job on anyone, and you’re right, many people’s jobs are getting caught up in the mess that’s been created.

    I agree, there’s quite a difference between being irresponsible and evil, that’s why I never used the E word or any other derogatory adjective.

    Of course, for those making the decisions, I think irresponsible is definitely an appropriate description of their actions and I definitely don’t like the thought of my hard earned tax money being used to prop up publicly traded corporations that took ill-advised risks and lost big time.

  • Lily

    I work with some of these “rich, irresponsible bankers.” They’re people. Like other, non-banking people, there are some nice bankers, some smart bankers, some arrogant bankers, some stupid bankers. Many bankers who weren’t at all involved in the mortgage mess have lost their jobs, and with the tight job market they can’t find new ones. I know, I know … boohoo, aren’t they all rich? No – only the people at the top are extremely rich. Everyone else … they’re mostly well off, but they’re not at the point where a job loss is meaningless. So let’s not make them out to be evil. A lot of them are just people.

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