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.

Monday, September 28, 2009

Next Crisis May Be Sooner Than You Think!

As we recover from the current economic crisis it’s normal to wonder about how long it will be before we have another. Some economists believe that, in part, our current crisis was born in the aftermath of the tech stock bubble. Why do they believe that? They say that the low interest rates introduced by the Federal Reserve were kept in place too long and fueled the housing boom that led to the mortgage crisis, etc. etc., etc.

On top of that, we had banks and hedge funds investing in risky credit default swaps and other new exotic, highly volatile investments. Congress hesitated to introduce needed regulation and even prodded the mortgage industry, including Fannie Mae and Freddie Mac to give mortgages to low-income people who really couldn’t afford what they were buying.

Now, the Federal Reserve is faced with a balancing act similar to what they faced in 2000 and 2001. It needs to avoid keeping interest rates too low for too long while at the same time keeping rates low long enough to support the recovery. If they keep rates low too long, it could trigger high inflation and continued deterioration of the dollar.

Many have hoped that Congress would introduce new regulations to help avoid the problems of the past. In a Wall Street Journal article September 9, 2009 (“Finance Reform Falters as Shock of ’08 Fades”), it was noted that: “On the regulatory front, Democrats’ effort to rework the rules for finance reform have bogged down amid infighting between federal regulators, fury among bankers and opposition from many lawmakers who believe that further expanding the government’s reach will only create new problems.”

At the same time, the article said, “U.S. Banks have regained their footing, and some of their swagger.” Banks are using financial products similar to those that caused the current crisis. The article noted that in the second quarter of this year, “the nation’s top five banks stood to lose more than $1 billion on an average day, should their trading bets go sour, a record level.” This rate compared to a potential $0.52 billion a day loss in 2006, $0.59 billion a day in 2007 and $0.87 billion a day in 2008.

It seems as though we never learn. Last fall, one would have thought that banks would be much more careful going forward. Perhaps the government bailout allowed them to avoid learning an important lesson. As a result, the next crisis may be upon us sooner than we would like to think!


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