Yesterday I was watching the College Football game between Oregone state and USC(Ranked No#1 state) . In the third quarter Quarter USC was trailing, 0-21. Just for a while I switched CNBC and was watching the updates on Wall street crisis. Well it was no exception .
Wall street is currently experiencing one of the worst crisis in its history after the great depression .Today The US financial turmoil is taking its toll on the global markets and the Wall street(Top Investment destination) firms are falling apart. The collapse of the financial giants like Bear Sterns, Lehmon Brothers, AIG & other organisations indicates that the problem is much worse than one expected.On Sep 18th The Dow Jones Industrial average touched its 52 week low(10,403.7) .The Global financial markets are no exception to this and are reeling under pressure.
As an investor on Wall street you might be wondering what is happening to the Wall street! Where is the Quarterback? Are we going to make a single touchdown this year or not?Do we have "THE GAMEPLAN" ?
Well let's start by asking some of the basic questions about Wall street.
How did US economy reach to this point?
Most economists agree that the problems which Wall street is witnessing today developed over a long period of time. For more than a decade, a massive amount of money flowed into the United States from investors abroad .This large influx of money to U.S. banks and financial institutions, along with low interest rates, made it easier for Americans to get credit. These developments allowed more families to borrow money for cars, and homes, and college tuition, some for the first time. They allowed more entrepreneurs to get loans to start new businesses and create jobs.
Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit, combined with the faulty assumption that home values would continue to rise, led to excesses and bad decisions.Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.Optimism about housing values also led to a boom in home construction.
Eventually, the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell, and this created a problem.Borrowers with adjustable-rate mortgages, who had been planning to sell or refinance their homes at a higher price, were stuck with homes worth less than expected, along with mortgage payments they could not afford.As a result, many mortgage-holders began to default. These widespread defaults had effects far beyond the housing market.
In today’s mortgage industry, home loans are often packaged together and converted into financial products called mortgage-backed securities. These securities were sold to investors around the world.Many investors assumed these securities were trustworthy and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac.Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put the US financial system at risk.
The decline in the housing market set off a domino effect across US economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses.Before long, these securities became so unreliable that they were not being bought or sold. Investment banks, such as Bear Stearns and Lehman Brothers, found themselves saddled with large amounts of assets they could not sell. They ran out of money needed to meet their immediate obligations, and they faced imminent collapse.Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt.
How much worse can it get?
The government’s top economic experts warn that, without immediate action by Congress, America could slip into a financial panic and a distressing scenario would unfold.More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically.And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs.Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And, ultimately, US could experience a long and painful recession.
How is the US Govt.(The Quarterback) planning to tackle the credit crisis?
In close consultation with Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke, and SEC Chairman Chris Cox, The Bush Govt. announced a bailout plan .
As per the govt First, the plan is big enough to solve a serious problem. Under this proposal, the federal government would put up to $700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system.In the short term, this will free up banks to resume the flow of credit to American families and businesses, and this will help our economy grow.
Second, as markets have lost confidence in mortgage-backed securities, their prices have dropped sharply, yet the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages.The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal.And when that happens, money will flow back to the Treasury as these assets are sold, and the govt expect that much, if not all, of the tax dollars they invest will be paid back.
Skeptics argue that there is no "Deal" on the table for this crisis .However Economists and market experts agreed that a government purchase of distressed assets would help reveal the extent of losses at financial institutions, a necessary step before the financial sector can rebuild itself.
Currently President Bush and the congressional leaders are working on passing the Bailout deal.
As the economic events unfold themselves we will see whether its "Deal" or "No Deal"!!!
God bless Wall street !!!
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