Credit Crisis 101 - The Cause of the Credit Crisis
The world is facing a growing credit crisis. How has it come to this? When did it start and where is it going? Generally speaking, the subprime mortgage crisis is associated with the reduced liquidity in the credit market in correspondence with troubles pertaining to the banking system. To go along with this, a struggling real estate market with decreasing values of property in combination with bad lending practices, among other downfalls, has compounded the credit crisis.
Although the credit crisis has been brewing for quite some time, it started to rear its head during the latter part of 2007 and throughout 2008.
When did the actual credit crisis begin? While it is difficult to pinpoint an exact date, most experts agree that the start was the bursting of the housing bubble in 2005 and 2006. In years prior, mainly from 2000 to 2005, lenders lowered their lending standards and the housing market boomed. But once interest rates began to climb and the value of homes took a turn for the worse, the bubble burst and the credit crisis began.
To go along with problems within the real estate market, there are many other issues that have led to the credit crisis. Some of them include high risk loans, inaccurate credit ratings, fraud within the mortgage industry, bad government policy and the difficulty of banks in putting a value on the rising debt on their books.
Currently the liquidity of cash is based on global investment banking principles which allow banks to borrow inexpensively. They turn their debts into securities which they then sell on. But it has become increasingly difficult to put a value on that debt. Banks currently need a way of continuing to keep their doors open and do business, though they have large quantities of debt on their books, which they cannot value. The difficulty in valuing the debt is the root of the current banking crisis. For this reason the United States government is providing some liquidity for the markets by creating government backed vehicles to acquire the bad debt from these financial institutions.
As you can imagine, these are not all problems which can be addressed and fixed in a short period of time.
Take for example the government policies that were and still are in place. Many experts feel that they are outdated, and simply not able to handle the current economy. In September 2008, President George Bush said, “Once this crisis is resolved, there will be time to update our financial regulatory structures. Our 21st century global economy remains regulated largely by outdated 20th century laws. Recently, we’ve seen how one company can grow so large that its failure jeopardizes the entire financial system.”
It is no secret that government policies and related structures are outdated and in dire need of change. But as President Bush stated, it is difficult to move forward with these changes in the midst of a credit crisis.
The current credit crisis has been a long time coming and it will be a long time fixing. For more information on the crisis and related details, take a closer look at the subprime mortgage crisis article at Wikipedia. This article gives a detailed account of all the major events and issues that have given rise to the current financial state of affairs. In addition the article is always being updated with the latest financial events and policy adjustments.
If you are interested in finding the best low interest credit cards go to our site www.credit creator.com and take a look. The interest rate details are constantly being updated with the newest information and the current prime interest rates.
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Credit Crisis Articles:
Will the Euro Survive the Credit Crisis? - Thu, 02 Jul 2009
The Euro has always had a marginal group of naysayers; there were always those who insisted that a common currency didn’t make sense for a region as diverse as the EU. As a result of the credit crisis, a bevy of critics have come out of the woodwork and declared that the Euro will not [...]
Texas and the Dakotas Best Municipal Bond Bets amid Funding Crisis - Fri, 03 Jul 2009
Montreal, Canada.
It’s not a pretty site for state finances.
California, the world’s ninth-largest economy -- is bankrupt once again. The state issued its first batch of IOUs yesterday as its coffers ran dry. Though extreme, California is certainly not alone this year as many other states grapple with a bear market in revenues, rising unemployment and increasingly grow dependent on Washington to fund state and municipal operations.
States face a cumulative shortfall of $230 billion dollars from now until 2011 as revenues plunge since 2007. In 2009 alone, the cumulative budget gap for states is $121 billion dollars, according to the National Conference of State Legislatures. Thus far, 42 U.S. states have slashed enacted budgets to cope with rising demand for services and sharply declining revenues, according to the National Governors Association.
State and local sales-tax revenues fell more sharply in Q4 2008 than at any time over the past fifty years. For the first two months of 2009, 41 states that reported tax revenues saw total receipts fall 12.8% compared to 12 months ago.
Of the $787 billion dollars recently legislated by Congress to boost economic growth, about $246 billion has already been deployed to states. In early June, Treasury issued $25 billion dollars in bond authority available to state and local governments under the Recovery Zone Bonds program.
The bad news, however, is that all of this money is now in the process of being spent by states and by next year more government assistance will be required because state revenues are still declining. This has created a dangerous cycle of government interdependence for the most fiscally challenged states – including California, which by all intents and purposes is basically broke in 2009.
I don’t like buying or owning an investment that relies on government support. We all know the rules can change suddenly in uncertain times and depending on government to secure your retirement or long-term investment goals is the wrong way to invest.
If you own a bunch of municipal bonds then I would carefully review your portfolio to ensure the following:
• Is your state solvent without federal aid? You can obtain this information at your state’s budget survey online or at www.sunshinereview.org;
• If not, consider several top-rated national municipal bond funds as ranked by Morningstar to ensure proper diversification and risk allocation;
• Make sure your municipal bonds or bond funds are liquid. If you have to sell your bonds then ensure there’s no liquidity issue. You shouldn’t have to wait more than 24-hours;
• Limit your portfolio duration to a maximum of 5 years. Duration measures interest rate sensitivity. Though rates will stay low for the foreseeable future, make sure you don’t own long-term bonds with maturities extending beyond 2015;
• States with the best balance sheets include Texas and The Dakotas.
Despite the compelling tax savings, I’m very cautious about most municipal bonds because I’m in the camp this economic expansion will be sluggish for the next few years. Consumers are not spending, the unemployment rate is still rising (at 9.5%) and the housing market has not bottomed. This will NOT be a typical post-WW II expansion because bank credit is not expanding and borrowers are largely absent.
Texas is currently only one of six states not facing a budget deficit. The same goes for North and South Dakota and several others.
In Texas, state revenues are projected to decline 10.5% in 2009 compared to 2008, the state has apportioned some money for emergency funding or a Rainy Day Fund. The Rainy Day Fund was established in 1987 following a severe economic downturn and a sharp decline in oil and gas prices. The fund is expected to reach about $9.1 billion in assets by 2011.
Texas, of course, relies heavily on oil and gas revenues to boost its balance sheet. The state continues to benefit from strong oil prices – which have doubled since February – and will shortly receive $11.4 billion from Washington’s Economic Recovery and Reinvestment Act or the $787 billion dollar stimulus bill. That will further cushion Texas’s coffers.
I like the prospects for Texas longer term. That’s because I’m an oil and gas bull and believe she’ll continue to benefit from the trend in rising energy prices and Peak Oil, or a global phenomenon tied to declining oil production coupled by rising consumption mostly in the emerging markets. You could say Texas is in a “sweet spot.”
Also, Texas, though taking federal assistance – like all states – can live without it. The state is one of the few in the Union to balance its books.
If you must own municipal bonds to reduce your effective tax rate, then be especially careful now. These are not normal economic times. The wrong way to invest for the future is to depend on government to bail-out your state -- which means that in the absence of federal aid your state might possibly default on its debt. Though unlikely, this is a growing possibility in the post-2007 credit crisis.
I’m off next week to Spain for a summer break. I’ll be back blogging on Tuesday, July 14 from Tonsberg, Norway. Until then, Happy July 4th and Happy Canada Day!
Peer-to-peer lending is flourishing amid the credit crisis - Tue, 30 Jun 2009
"Twebster302" needed $1,200 for a root canal. "JulesWWC" wanted $13,000 to open a fair-trade chocolate shop. "Needhelp," who said he's a state employee, asked for $1,000 to get his finances in order and help his handicapped brother.
These and other cash-strapped borrowers are part of the financial world's version of Match.com. They're posting personal financial profiles in hopes of connecting online with investors seeking sweeter returns.
Known as peer-to-peer lending – or P2P for short – it's a 4-year-old industry that's flourishing amid the current credit crisis.
"It's a complete 180 in terms of how people look at their debt, but there's no better time for something like this," said Curtis Arnold, author of a book on the burgeoning industry.
The number of Web sites – and participants – has grown in recent months, fueled by struggling borrowers and tight-fisted bankers.
LendingClub.com, a Sunnyvale-based site that hosts only prime borrowers with credit scores above 650, more than doubled its membership, from 82,000 in January to 140,000 in May.
And at least two P2P sites are in the midst of issuing stock, including New York-based Loanio.com, which filed a $50 million initial public offering June 22 with the Securities and Exchange Commission.
For borrowers, P2P lending is a way to get past hesitant bankers or to avoid high-cost loans. For lenders, it's a chance to earn more than a lowly 2 percent on a CD or risk the stock market.
In either case, it's a way to formalize a loan between friends – or even perfect strangers.
Here's how it works: Borrowers attract lenders by posting profiles detailing their financial goals online. They display credit scores, personal tales and even pictures of puppies in hopes of landing a willing lender.
Investors peruse those listings and agree to make loans as small as $25. They earn interest rates of anywhere from 7 percent with the safest borrowers to 20 percent from the riskiest.
Mark Leyes, spokesman with the state Department of Corporations, which licensed the two California-based sites – LendingClub.com and Prosper.com – said P2P sites will likely continue growing, even after the recession lifts.
The sites are "democratizing" lending, he said. But it's not without risks. The Federal Trade Commission, for instance, hasn't evaluated P2P lending.
"We certainly need to understand better how it works and what the risks are to consumers," said Tom Pahl, a director with the FTC's Division of Financial Practices.
Some have already discovered those risks. Fair Oaks resident Chris Abarca started lending small amounts on Prosper.com, then stopped last fall after too many borrowers paid late or defaulted.
"I just didn't want to spend any more dough and have it go sour," Abarca said, who said he loaned as much as $15,000 during his most active period.
Since its inception in 2005, Prosper.com has had about a 20 percent default rate among its 60,000 loans. Prosper stopped accepting new transactions or speaking to the media as it awaits SEC regulatory approval for an initial public offering.
Joanne McNabb, director of the state Office of Information Security and Privacy Protection, said she wouldn't recommend borrowing or lending from a P2P site.
"With a bank, you know they exist somewhere, you know who they are, you know who their regulators are," she said. "In online P2P lending, you don't."
Eric Di Benedetto of Marin County feels otherwise. He is loaning $1 million at LendingClub.com and said he gets double-digit returns.
"I was thinking about retirement funds and considering the high volatility of the stock market," he said. "You need something that will work in the long term."
He said the social networking aspect compels borrowers to pay back because they're borrowing from an individual, not a faceless corporation. And everyone knows when you don't pay it back.
On most P2P sites, there's more money requested than offered by investors, even with twice as many lenders as borrowers. Continued funding could become a problem for the industry, especially once lenders are lured elsewhere when the economy improves, said Jessica Ward, who blogs about P2P lending.
Reynaud Laplanche, LendingClub's CEO, compares P2P's growth to the 1990s launch of stock trading sites like eTrade or Schwab. People were timid to go online for trading but later found it convenient and less costly.
He sees P2P spreading.
"There's no shortage of market, and so competition is not a bad thing at all," he said.
Poll finds Alan Greenspan to blame for credit crisis - Reuters
 Reuters | Poll finds Alan Greenspan to blame for credit crisis Reuters LONDON (Reuters) - Greedy bankers are routinely blamed for the credit crisis but one British-based poll of -- well, financiers -- spreads the blame more ... Greenspan tops poll asking who caused the credit crisis SmartBrief Only the timing in doubt Asia Times Online all 14 news articles |
In This Crisis, Government Spending Isn't Likely to Do Us in ... - Huffington Post
In This Crisis, Government Spending Isn't Likely to Do Us in ... Huffington Post To me this is crucial to contain the worst of the credit crisis. So can the foreign trade and US household spending imbalances be adjusted? Yes, they can. ... US Needs Game Gangers, Not Forbes all 5 news articles |
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