Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Tuesday, June 2, 2009

How We Got Into This Mess - Part I

We felt it was appropriate in our first BLOG entry to spend some time talking about the external factors that have brought about the current financial crisis.  We believe it is unfair to point to any one individual or group as the cause of the crisis.  Many factors contributed to the mess we’re in.


We believe that low interest rates established to fight the recession caused by 9/11 and the tech stock bubble in 2000 contributed to the housing bubble that followed.  Congress, in an effort to provide more housing for the less fortunate prodded Fannie Mae and Freddie Mac to provide low cost mortgages to individuals who really couldn’t afford them.  Some mortgage sales reps accepted applications they knew were false.  In order to maintain their competitive position, company management backed the employees’ actions.  Some appraisers over-valued homes to allow individuals to take out larger mortgages than were justified.  Real estate speculators added fuel to the fire.


Bad mortgages were packaged together and sold to investors.  These securities were then insured via credit-default swaps.  Credit-default swaps are actually a type of insurance.  Insurance companies are required to maintain reserves to cover possible losses from their insurance policies.  Unlike regular insurance policies, credit-default swaps required no reserves and Congress failed to regulate them.   Financial institutions sold billions of dollars of credit-default swaps.  When the real estate bubble burst and home prices dropped, there were no reserves to cover the financial institution losses.  Banks stopped lending and our entire economy came to a screeching halt. 


As you can see, there were many contributors to our current problems.  We’ve probably missed a few in our short explanation.  No one person or group is to blame.  Yet there’s another side to this story.  It’s what the American people have done (or not done) to contribute to the problem.  We’ll discuss that in our next blog entry and later discuss what you should be doing to restore/strengthen your financial foundation.




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