Our Next Financial Crisis

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 stock market crash

October, 2008:  Stock Market Avalanche

Ten years ago, back in October, 2008, the stock market tanked.  The uncertainty from the big bank bailouts and near-collapse of the economy was reflected in the wild volatility of the stock market.

The Dow Jones Average, at over 11,000 in the third quarter of 2008 was now below 8,500, resulting in year-to-date stock losses of over $8.3 trillion.  The news of government bailouts rocked the markets and no one wanted to be in equities. It was a scary and dismal time and the instability was not to be contained.

Imagine losing your job or worrying about your job security at the same time knowing that your investment portfolio was evaporating.  Not a fun time.

More reasons on the financial collapse:

1. Due to loosened regulations on the expansion of credit, banks were permitted to extend loans that were too risky for the borrowers

2. The inception of creative mortgage instruments and complexity that most didn’t understand

3. A variety of mortgage products including 100 percent lending, mortgages with teaser rates, adjustable rate mortgages, negative amortization mortgages, and balloon payment mortgages

4. Mortgage fraud – reckless mortgage writing and no verification of borrowers (NINJA)

5. Mortgages given to individuals that were high risk borrowers

6. Deregulation that allowed securitization of mortgages.  Mortgages were bundled and sold as low-risk investments.  By securitizing the loans, they passed risk on to the investors.

Both borrowers and regulators should have been skeptical of these banking practices.

Causes of 2008 Economic Meltdown: Thesis

credit

 

How recent legislative changes are contributing to the same economic risks

 Here are some current unraveling activities, noted in an August 25 NY Times article.

May, 2018: Dodd-Frank law was changed to allow more banks to be exempted from financial regulatory standards by increasing the asset threshold.  Prior to the change, banks with assets up to $50 billion were exempt to agency oversight.  The new threshold was changed to apply to banks with asset up to $250 billion; therefore, more banks will avoid supervisory procedures.

Reducing penalties on lenders involved in predatory lending

Easing up on the Volcker Rule which restricts large banks from using depositor money to engage in highly-leveraged instruments.

Next, our pending financial transgression is the outstanding student loan market and how it will impact our economy.

Student loan crisis:

The $1.5 trillion dollar student loan market is the next debt crisis, according to several sources.  It’s not reassuring that the White House official in charge of protecting the student loan consumer base has recently resigned.  He’s claimed that the changes under President Trump at the Consumer Financial Protection Bureau has furthered their neglect in protecting Americans.

In his resignation letter, he speaks to decision made that lean in favor of political parties, instead of remaining independent.   He also notes that when large banks were set up to impose excessive fees, public reporting was repressed.  It’s his belief that the current practices of the CFPB will cause the financial ruin of many Americans.

Seth Frotman’s Resignation Letter

 

One of the risks in this market is that there are no underlying assets to collect in the event of default.  In addition, it undercuts the ability of the average individual to reach middle class milestones, like buying a home, having a family, and accumulating retirement assets.

It’s also been reported that the Great Recession has led to the pending student loan crisis.

State funding of schools has been severely downsized which caused the increase in tuition.  In tandem with an extremely competitive job market, expanding one’s skillset looked to be the best solution.  Students graduating with undergraduate degrees furthered their education with a master’s, taking loans for the full boat.

Easy loan money, provided by government guarantees, and schools that promise job placement pave the way to predatory lending or excessive borrowing, which is not so easily paid.

3 Ways The Great Recession Turned America’s Student Loan Problem Into A Crisis

 

While I’m on the subject of economic volatility, I want to refer to a book that I reviewed on my blog about a month ago, The Age of Anomaly.

The author, Andrei Polgar, is a proponent of protecting wealth and having an investment portfolio that can withstand a severe financial storm.

He discusses today’s economic uncertainties being global conflict, the wealth gap, reliance on technology with exposure to a cyber attack, and employment shrinkage due to technological advances.

These are all fear factors that are forgotten when the economy is chugging along.  If you’ve been investing over the past 7 – 8 years, it’s easy to feel like an investing genius.  With the stock markets reaching new record highs, now is the time to be creating a resilient portfolio.

Which brings me to next week’s topic: asset diversification and extreme money scripts

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