Reasons For the Financial Crisis

Seems to me that people talk a lot about things but they rarely investigate reasons, causes, and solutions. For example, bailing out the banks neither addresses the reason for the crisis nor is it a solution to the original causes that created the crisis, but recently it's all people talk about. Thus time is wasted on the topic and it comes to be perceived, at least by some, as a 'solution'. It's far more acceptable to talk about events and then hint at some usually one line liberal sounding solution than it is to engage in an actual substantive analysis. In fact, I would argue that in recent times it has become somewhat unacceptable to even talk about certain issues, but maybe that's another article. In this article I would like to investigate some of the reasons for the financial crisis. Without getting political (yet), one can formulate a 'by definition' cause:

We borrow more than we can responsibly pay back.

This is a rather obvious cause of the financial crisis we are in. We do it both individually and as a nation. Our government sets a bad example by spending more each year than it receives. Our money then flows overseas to foreign nations in the form of interest on loans. US consumers borrow more than they can pay back, and banks let them do it.

This is simple enough and hard to disagree with. Now there are probably several reasons why we borrow more than we can responsibly pay back, but let's just consider one good one.

We produce less than we consume.

This is rather strait forward. We don't make things anymore. It has been said that America is a paper economy. Some people seem to be able to ignore basic laws of physics. You can't go along producing nothing and consuming everything for long until things start to get out of whack. But that's exactly what America has been doing. We have been running a trade deficit for years and it only seems to get worse not better. As a result nations like China have all our money. We send it to them in the form of the trade deficit. Producing less than we consume explains why we borrow more than we can responsibly pay back. Now why do we produce less than we consume?

It's not profitable to hire people to manufacture things.

Again that's sort of by definition true and I have so far avoided getting political. We don't manufacture things in America because it's not profitable to do so. I think there are many ingenious Americans that could probably invent some really good manufacturing processes. In fact they did, but unfortunately the processes were exported overseas and other countries get to enjoy the business advantages of using the technologies. Anyway since it's not profitable to hire people to manufacture things we produce less than we consume. So why is it not profitable to hire people to make things in America?

Our government imposes excessive taxes and regulations on businesses.

Simply put our government makes it difficult or usually foolish to hire workers to make things. It's better to do it overseas. Ironically the government usually does this to 'protect' workers, but the media never considers the result of the 'protection' is that the jobs no longer exist. Our government imposing excessive taxes and regulations explains why it's not profitable to hire people to manufacture things.Continuing back up the chain we arrive at the final result: Financial Crisis.

I don't think most people look at things like this so they don't understand the reasons for our current situation, and they have no idea what the solution is. When it comes to our current crises they just 'react' they get upset about giving money to bankers, or maybe they get scared enough that they are willing to give money to the bankers. Either way most people are simply reactive in nature and that solves nothing. We need as a culture to reward substantive dialogue. Instead, I believe substantive thinking has come unfortunately to be often punished in our culture. Pure symbolism and social talk is a waste of time but it's the level most people find themselves on most of the time, deviating from it is breaking the collective rules of behavior we seem to have either decided on or arrived at.

Now I am a person that likes to generalize get abstract a bit. I have kept it simple to this point. But I want to explain the financial crisis from the viewpoint of a larger theory. Sort of like relativity compared to Newtonian Mechanics. My big generalization for what is going on is called 'socialism'. Everyone acts like they know what it means but it would be foolish to assume the average voter could give you a good definition of it. The average voter understands words like "change" the democratic slogan, but even then they misapply the principle because the democrats don't represent change but just more of the same thing the republicans gave us: socialism. But before I get distracted again lets define socialism:

Socialism is a form of collectivism where the government controls what would otherwise be private property ostensibly for the good of society and usually for the purpose of promoting equality.

That's my definition anyway you can check the dictionary to see if I'm close.

I am going to present a single argument against socialism. I have many but I have one that suffices and is really simple. I call it the 'empirical' argument. Empirical because it is based on a single undeniable universal observation:

All nations that went the socialist route and to the extent they did suffer financial crisis.

There are also other observations. For example, inequality is not eliminated in socialist systems but always dramatically increased. The reason, of course, is when you're in financial crisis every penny really counts and for the have-nots socialism is a real tough situation. I have traveled a few socialist societies. In Laos, for example, the hotel clerks at a relatively nice hotel make about $45 a month. I think there is a bit of arrogance almost bordering on racism in America when we assume we can go the same socialist route without the same thing happening to us. We can't.

Most voters don't recognize America as socialist. They don't want to admit we are a socialist nation and members of the left usually say something like: 'The best theory is a mix of capitalism and socialism.' When you consider that the endpoint is less than $45 a month I don't think anyone wants to experience pure socialism. Even the Lao people enjoy some free market reforms or they wouldn't make nearly such a high wage.

Imagine a continuum where on one side you have freedom and on the other pure socialism. When one considers the sheer magnitude of US government spending we are a good way towards socialism in the continuum. I would argue regulations also have to be factored in, and due to our relative prosperity the left has managed to impose more regulations on business than occurs in many more purely socialist societies. In fact we may have more burdensome regulations than has ever occurred in any society for all history. In a way it's quite an astounding liberal achievement. But when you factor in regulations and place us in the continuum we are nowhere near the freedom side and getting closer and closer to the socialist side. So following the empirical argument we should be suffering and we are. I suppose you could call it experimental verification the hard way.

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Robert Badaracco - EzineArticles Expert Author

How to Save Money Using the Balance Transfer Credit Card

Credit cards are now essential for many people when it comes to paying bills, purchasing items, shopping, and the like. Using lines of credit is indeed very convenient rather than making cash payments. You just have to swipe them instantly and you are done.

There are several advantages to using cards instead of cash. One example is you have easy access to services and goods because visa and MasterCard are accepted widely and even internationally. In addition, using credit cards is an effective and safe way to keep track of your finances.

However, having and using credit is not that easy. You have to know a lot of methods when using your plastic. One specific method would be the credit card balance transfer. This allows the a cardholder to transfer his current balance to another card. There are many companies that offer low APR credit card applications to encourage clients to sign up for them.

Most credit card companies offer balance transfer credit card deals that will help you save large amount of money in interest payments. Searching on the web is the easiest and most convenient way to look for reputable banks that offer enticing choices you can choose from.

You should read terms carefully and make sure you would be able to save more than with your previous one. Some card companies even offer APR balance transfers with 0% interest. However, their annual fees cost too much. So you must be careful and be practical when choosing the right company. You should also make sure that your balance transfer does not go beyond the limit of your new credit card.

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7 Best Strategies During the Financial Crisis

It's easy to lose focus and panic during a financial crisis. There are brighter times ahead so get your head out of the sand and start right away. Here are 7 strategies for you to review and keep in your back pocket so that you can stay on track to protect and build your assets back up:

1. Make a budget. Budget is a dirty word to almost everyone. So let me put it this way- watch your cash flow. Track what goes on and what goes out. Get on a money diet. There are many free and lost cost tools to help your track your finances like Mint, Wesabe, and Quicken. Find one you like and use it. You'll be surprise too at how easy it is to pay bills online, too.

2. Get out of debt. Easier said than done, right? Start with consolidating all of your cards to a low or no interest one and then start paying off that one. You will be paying down more of the principal than the interest which helps it go down faster. Meanwhile tear up the ones you own until you get the debt under control.

3. Make cash work for you. Get your cash out of the coffee can, or from under the mattress and invest it. That's right, invest it. If you are nervous that we are headed for a depression, then invest in something that will guarantee your principal back like a bank account or certificate of deposit. If you don't, those dollars under the mattress are a guaranteed loss. They are guaranteed to buy less and less goods and services by the amount of inflation we have each year. And you don't want that.

4. Pay off higher interest debt with low interest funds. Cash is king right now. If your savings is 3% and your mortgage is 8%, then it's obvious to start using your savings to pay down the mortgage. Don't do this until you have enough cash in the bank for emergencies like fixing the roof, car repairs, etc. Be on the extra safe side and have enough cash to support you for 6 months in case you lose your job.

5. Keep contributing to tax deferred plans. Don't stop believing, and don't stop saving for retirement. Believe me that one day you will want to stop working and when that day comes you are going to need the funds to support yourself. Tax-deferred funds in a pension, 401K, 403b, etc. are the fastest way to accumulate money. Be brave and keep contributing the maximum. You will be glad you did years from now.

6. Have an investment strategy and stick to it. Many of you who did not have a strategy to look at in this crisis are the ones that panicked and sold everything and now wonder if they did the right thing. The federal government is spending like crazy and that means inflation is on the horizon. That means you need to be invested in equities to keep up with taxes and inflation. Buy and hold is my favorite all time strategy. It is easy, boring, and was thought up by Pulitzer Prize winners in economics and favored by some of the (still) wealthiest people in the world.

7. Don't abandon diversification. Just because one sector is doing so well that you want to bet the whole farm on it is chasing performance. Stay disciplined with a diversified strategy. Cash for emergencies, equity investments, fixed income investments, and real estate should help you stay ahead of the game. Avoid the temptation to chase after high yield high risk investments to make up for losses in the past.

By following the 7 strategies above you can rebuild your portfolio and protect it from taxes and inflation. In tight times like this, many scams will be floating around. If you focus on your personal financial strategy to build wealth, you will be set for brighter times ahead.

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Personal Financial Crisis Solution

If you're currently going through a personal financial crisis, most likely you are feeling symptoms of stress and depression. These are very typical conditions associated with experiencing the traumatic experience of overwhelming debt. Being under this much stress can effect your judgment and you may be tempted to jump to a seemingly good option that can end your financial troubles.

There are a number of ways to approach and find a solution to your personal financial crisis. First, you must take a good inventory of the source of your financial troubles. Who do you owe money to and how much? This is important because if the source of your debts is consumer debt, then personal bankruptcy maybe an option. However if your debts are tax bills, gambling debts, student loans or money you owe due to law suits, you may be able to use the services of a debt consolidation firm.

In the case of tax bills, it is often better to consult with a tax attorney as they are much better at dealing with the IRS and may be able to negotiate a better repayment plan.

Americans have gotten themselves in a lot of debt in the last decade, starting with the housing bubble that left many with a lot of mortgage debt and very little sustainable value. If the source of your debts is consumer credit cards, personal loans or mortgages, you could take one of two routes, one is to restructure your debts with debt consolidation or chapter 13 bankruptcy.

Many people see filing bankruptcy as a very negative thing, but it is a legal right afforded to all American citizens under federal law that can save you from debt collectors and further debt. Your personal financial crisis can start to ease up as soon as you take the first step by consulting with bankruptcy attorney.

Want to end your financial struggles once and for all? Start feeling better immediately, get a 100% Free Bankruptcy Evaluation. You have no obligation to file, learn the facts about your case and find out which bankruptcy chapter can help you end your personal financial crisis once and for all.

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The 2008-2009 Financial Crisis – Causes and Effects

The 2008 financial crisis is affecting millions of Americans and is one of the hottest topics in the Presidential campaigns. In the last few months we have seen several major financial institutions be absorbed by other financial institutions, receive government bailouts, or outright crash.

So what caused the financial crisis of 2008? This is actually the perfect storm which has been brewing for years now and finally reached its breaking point. Let’s look at it step by step.

Market instability

The recent market instability was caused by many factors, chief among them a dramatic change in the ability to create new lines of credit, which dried up the flow of money and slowed new economic growth and the buying and selling of assets. This hurt individuals, businesses, and financial institutions hard, and many financial institutions were left holding mortgage backed assets that had dropped precipitously in value and weren’t bringing in the amount of money needed to pay for the loans. This dried up their reserve cash and restricted their credit and ability to make new loans.

There were other factors as well, including the cheap credit which made it too easy for people to buy houses or make other investments based on pure speculation. Cheap credit created more money in the system and people wanted to spend that money. Unfortunately, people wanted to buy the same thing, which increased demand and caused inflation. Private equity firms leveraged billions of dollars of debt to purchase companies and created hundreds of billions of dollars in wealth by simply shuffling paper, but not creating anything of value. In more recent months speculation on oil prices and higher unemployment further increased inflation.

How did it get so bad?

Greed. The American economy is built on credit. Credit is a great tool when used wisely. For instance, credit can be used to start or expand a business, which can create jobs. It can also be used to purchase large ticket items such as houses or cars. Again, more jobs are created and people’s needs are satisfied. But in the last decade, credit went unchecked in our country, and it got out of control.

Mortgage brokers, acting only as middle men, determined who got loans, then passed on the responsibility for those loans on to others in the form of mortgage backed assets (after taking a fee for themselves originating the loan). Exotic and risky mortgages became commonplace and the brokers who approved these loans absolved themselves of responsibility by packaging these bad mortgages with other mortgages and reselling them as “investments.”

Thousands of people took out loans larger than they could afford in the hopes that they could either flip the house for profit or refinance later at a lower rate and with more equity in their home – which they would then leverage to purchase another “investment” house.

A lot of people got rich quickly and people wanted more. Before long, all you needed to buy a house was a pulse and your word that you could afford the mortgage. Brokers had no reason not to sell you a home. They made a cut on the sale, then packaged the mortgage with a group of other mortgages and erased all personal responsibility of the loan. But many of these mortgage backed assets were ticking time bombs. And they just went off.

The housing market declined

The housing slump set off a chain reaction in our economy. Individuals and investors could no longer flip their homes for a quick profit, adjustable rates mortgages adjusted skyward and mortgages no longer became affordable for many homeowners, and thousands of mortgages defaulted, leaving investors and financial institutions holding the bag.

This caused massive losses in mortgage backed securities and many banks and investment firms began bleeding money. This also caused a glut of homes on the market which depressed housing prices and slowed the growth of new home building, putting thousands of home builders and laborers out of business. Depressed housing prices caused further complications as it made many homes worth much less than the mortgage value and some owners chose to simply walk away instead of pay their mortgage.

The credit well dried up

These massive losses caused many banks to tighten their lending requirements, but it was already too late for many of them… the damage had already been done. Several banks and financial institutions merged with other institutions or were simply bought out. Others were lucky enough to receive a government bailout and are still functioning. The worst of the lot or the unlucky ones crashed.

The Economic Bailout is designed to increase the flow of credit

Many financial institutions that are saddled with risky mortgage backed securities can no longer afford to extend new credit. Unfortunately, making loans is how banks stay in business. If their current loans are not bringing in a positive cash flow and they cannot loan new money to individuals and businesses, that financial institution is not long for this world – as we have recently seen with the fall of Washington Mutual and other financial institutions.

The idea behind the economic bailout is to buy these risky mortgage backed securities from financial institutions, giving these banks the opportunity to lend more money to individuals and businesses, hopefully spurring on the economy.

What? Credit got us into this mess! Why give more?!?

Ironic isn’t it? Yes, it is true that credit got us into this mess, but it is also true that our economy is incredibly unstable right now, and being that it is built on credit, it needs an influx of cash or it could come crashing down. This is something no one wants to see as it would ripple through our economy and into the world markets in a matter of hours, potentially causing a worldwide meltdown.

As I previously mentioned, credit in and of itself is not a bad thing. Credit promotes growth and jobs. Poor use of credit, however, can be catastrophic, which is what we are on the verge of seeing now. So long as the bailout comes with changes to lending regulations and more oversight of the industry, along with other safeguards to protect taxpayer dollars and prevent thieves from not only getting of the hook, but profiting again, there is potential to stabilize the market, which is what everyone wants. Whether or not it works is to be seen, but as it has already been voted on and passed, we should all hope it does.

by Patrick on September 29, 2008