Gas prices aside, what the hell is happening?

Our financial institutions are failing at an alarming rate and the stock market is reacting (negatively). We're in a recession now and the next stop is a depression. Government bailouts in the past month or two have cost the taxpayers over $800 billion in the last two months alone.

Who is to blame for this mess? What needs to be done to fix it?

Feel free to add yout 2¢.

Although through my financial advisor, I invest small amounts in the Stock market, I know little about it's inner workings. I let him do all that. These companies folding up or going under are certainly "big" names, and athough I don't know specifis, I do hear an "alarm" going off. I think the general public may not even realize how serious this could be. Most average people like myself, know of Wall St. but few understand the system. That being said, I am worried. Is this a stock market crash???? You know like 1929??? Or, is the potential there?

Who's fault? I don't know. Is it the mortgate companies who perhaps gave loans to anyone by stretching the rules and/or lying???? It seems to be where this started no?

One thought that comes to my mind is, "and they want to invest my socil security in the stock market?" With the bang up job the powers that be are doing now, I'll say no thank you.

I look forward to reading others' responses to see if most are alarmed as I am. I'm sure I'll learn a lot. At this point though, I don't know how or who can fix it.

TIS

The sad truth is that the housing boom that we enjoyed was, no pun intended, a house of cards. People who couldn't afford homes were given interest-only mortgages so that, on paper, they could afford them. Or, people leveraged equity (again, that existed on paper) in their permanent homes to speculate in other real estate markets. Then, when the prices started to plummet, they were unable to sell either home quickly enough and/or for enough money to pay off the loans, and that's when the foreclosures started.

These financial institutions invested heavily in real estate, be it the stock of homebuilders or in mortgages, and now those investments are nearly worthless. Therefore, their "assets" are also nearly worthless and they can't meet their payments.

The other thing to remember, TIS, is that maybe you don't THINK you have much invested in the stock market, but you do. Your pension plan, your money market, your 401K, your long term CD, your bonds, they're all invested. And that's why the volume of trading is so high, and why the fluctuations are really NOT the cause of alarm. In October of 1987, known as Black Monday, the Dow dropped over 500 points, but the volume of shares traded was so much lower than it is today. The Dow Jones average then was probably around 2,000. The Dow was down almost 500 yesterday, but it still closed at almost 11,000. So while the numbers are still frightening, the percentages are completely different.

In addition, you have rising costs of food, energy and fuel, three staples, which has caused a downturn in the money being circulated. Also, many businesses are reluctant to raise prices because they fear it will drive away customers, so they're breaking even or operating at a loss just to keep the doors open. For example, I read today that General Mills saw a nice upturn in sales because people are eating home more. However, because their costs have increased so greatly, despite the fact that sales rose, their profits still fell.

Who can fix it? Time. What goes up must come down. The economy has crests and troughs. Right now we're in a trough. And eventually, although it may take years, it will go back up. And then banks will once again open their purses and make unwise lending decisions. It happens.

The economy is wonderful, I have 7 (I think) houses to prove it!

Like SB said, the main problem is leverage. In the last five years, everyone - banks, corporations, individuals - borrowed too much.

Think of the following situation: a person buys a house by putting down a 5% deposit and borrows the rest. Imagine that the house value declines by 10% or 20% and for whatever reason, he has to sell his house (maybe he lost his job and can't afford it anymore?). That guy is screwed, right?

That is what is happening today. Banks borrowed money to invest in mortgage-backed securities, among other securities. As the housing market tanked, these securities went down in value and became less liquid (meaning no one wanted to buy these securities, so the banks couldn't raise any money from selling). Not able to sell these assets, banks tried borrowing from other banks, but banks with any excess cash stopped lending to other banks because they were worried about their own liquidity. Being unable to sell these assets or borrow from other banks, the troubled bank has to turn to the government - first, borrowing from the discount window and in the extreme, you'll see the Mac/Mae/Bear Stearns bailouts. This problem affects corporations as well because if banks aren't willing to lend to each other, they sure aren't willing to lend to corporations (unless the interest rate is so high that it's an offer they can't refuse). High borrowing costs for corporations affects employees who'll see smaller raises and a higher probability of unemployment.

For the system to be righted again, these companies need to write-off these assets to their true value (which is hard to do because these assets are complicated and hard to value), pay off their debts and institute rules to prevent problems in the future (e.g. increase the reserve requirements, stop relying so much on the ratings agencies, etc...)

As for the individual investor, I believe the best thing to do right now is to not panic. Do not sell all your assets and put it under your mattress. Over the course of decades, the long-run return of the stock market is approximately 7% to 10%. The market has always shown that it will right itself. Although it may take a little longer this time, it will do so again.

Thanks for the explanations, SB and DB! I wasn't in panic mode, but really HATE seeing all those red numbers in my (very small and modest) portfolio! Looks like some are bouncing back a little bit today, but it's like 1 step forward, 10 steps back!

Too much money going overseas.

I also hate those red numbers. You gotta wonder if there is a full blown Depression on the horizon. This time, its gonna be worse then the 1929 one, as there is more money going around.

One has only to look at the movie "Wall St", and the Michael Douglas character told us that "Greed is Good". For who, the CEOs? As SB said, create a "house of cards" and make people believe they can play. Soon histeria (greed) takes over. Remember the dot-com craze of the Clinton era? Companies founded on a promise and investors cashing in. Hey Big Daddy Bush, instead of looking for those WMD you should've been checking on the banks, investment companies and oil boys. Oops, you're one of them, nevermind.

Didn't the stock market go up today as much as it went down yesterday? I don't know much about this stuff but perhaps it'll go back up as quickly as it went down.

The whole reason for the government bailout was to help the market. I hope it does exactly that.

Doubtful. It will surely go back up, but there's too much uncertainess with the economy for it to make a quick, complete recovery now.

But it is worth noting that the stock market had the biggest single day gain since 2002. We'll see what happens tomorrow and next week. I'm very interested.

So from many replies here, what goes up, must come down and basically "don't worry." Yet, from listening to the news on this story, it's a complete mess and it sure seems like there is cause to worry or why is this even a story? If all of us keep our money invested, and nobody worries, it'll be ok??? I don't know.


TIS

I'm worried that the real biggies (Bank of America and now Citibank) are buying up all the failed institutions. Bank of America bought up Merrill Lynch and Citibank is considering a buyout of WAMU. That's all fine and dandy, but remember - the big banks are also buying the other institutions' debts. If the big banks falter we can all kiss our assets goodbye.

Did anyone watch the Daily Show yesterday?

Regarding the stock market turmoil:

Jon Stewart opens with the line (loosely) "Great news everybody...we own an Insurance company." And it only cost 85 million dollars.
Ah yes, I guess it's good to joke....that did make me laugh though.


TIS

That'd be $85 BILLION.

That makes it 1,000 times funnier.

I couldn't remember if it was million/billion What's a few dollars more?

Btw, one thing I've learned about some of these financial institutions that have gone under. AND, not that I come anywhere close to having this kind of money, I'll pass it on. I hear that those who have a large amount of money in banks, might want to keep no more than $100,000 in one bank. Usually, I understand, they insure and/or will let you withdraw only that amount, should the bank go under.

TIS

That's right - the FDIC insures an individual bank account up to $100,000. If you have $150,000 in your account, you MIGHT want to spread it between two different banks.

Whether you should worry or not depends on your status in life, TIS. If you are near retirement age or have recently retired, and your pension fund just took a big hit, you may need to keep working. If your 35, and will be investing and adding to that pension fund for another 30 years, then don't sweat it. You'll probably go through many more of these cycles before retirement.

That's right SB. Also, your stage in life should determine the allocation of your portfolio. The closer you get to retirement age, the more conservative your portfolio should be.

The news stories on the stock market is exactly like the news stories during hurricanes - sensationalized and designed to draw you in. To be sure, we are going through a pretty historic decline in the market (notwithstanding yesterday's increase and this morning's increase) and I think we still have a few painful days ahead, but once again, the long-term view must be taken.

Gloomy times!

Although its not nice to see the economy suffer and people losing their jobs,it's hard to feel to much sympathy for some of the banker types whoo have been earning mega bucks for years whilst fleecing the likes of us!

Ya mean like the big coporate boss who got £22million a year whos now crying the blues.

He would be a good example yes!

They are saying now that the Stock Market will only make "ends meet" when investing. Gone are the days when people used to make a killing. I find this very depressing, and as for the fact that nowadays you have to do illegitimate things to make some real money. Its been going for years that working for a living never actually gets you anywhere.
I read that everyday, there are a million people worldwide trying to get rich, but only a handfull actually get anywhere. Proof is everywhere that people are trying to make an extra buck. Ya gotta know someone who is "wheeling and dealing", selling duty free cigarettes?

That's alright --

this thing's gotta happen every five years or so -- ten years -- helps to get rid of the bad blood.

Sicilian Babe and Don Sicilia are spot on and both answers summarise the UK situation as well. It's such a general question that I doubt even collectively we'd cover all the areas but here's my angle:

Due to a little aquisition that's going through, I actually work for what will be the largest bank in the UK (currently the only UK bank within the top ten of the worlds safest banks). I only have experience with personal banks rather than investment banks (Lehman Bros) though.

A couple of years ago, whilst working in the mortage end of the bank (within a sales retention team), I wondered why we weren't offering the best deals in the market. Why were we passing on the buy to let, 100% (and more frightingly 110%) mortgages, or higher risk borrowing that so many banks were eager to gain? It made my job harder, knowing someone was leaving the bank to chase a better rate with Northern Rock (now nationalised to prevent it going bust).

Instead we took a prudent approach, and right now it's paying off.

I can't speak for the US, but within the UK the safest banks will only invest (read mortgage lending) money that is deposited within their bank by customers.

The trouble is, with some banks (particularly Northern Rock), is that they lend money that they don't have. They raise the funds by selling the debt on to the wholesale money market (for example Lehman Brothers). So now as those funds are not available as credit is tightening, these type of banks find they're short of funds.

Luckily my work are not too exposed to the Lehman Brothers crash - but there's plenty of others within the UK that are, and obviously it's affecting the US.

Individuals have to take a lot of responsibility for themselves as well. Anyone taking out a mortgage for more than 95% of the value of the property are taking an incredible risk. These products became very popular only 3 or 4 years ago. Although you'd be lucky to find one now. To expand of Don Sicilia's point, if you take a £100k mortgage on a property worth £100k (a 100% mortgage - loan to value is equal), and that property's value decreases by 10%, so it's now worth £90k. If you're ever in a situation where you're getting reposessed (maybe interest rates are increasing or inflation is increasing - you can't meet the payments. Both of these situations are prominent in the UK which i'll get to in a second), suddenly you've paid back the £90k the property is worth - but you're also in a position where you're liable for an additional £10k to pay the rest of the borrowing.

So, interest rates:

Again, can't speak for the US or Federal Reserve but the Bank of England are in the unenviable position of trying to curb inflation, yet get the economy back on track. To keep it simple, let's attribute inflation to the cost of oil increasing. We have very little, maybe no control over that, so traditionally when inflation is increasing the Bank of England would increase interest rates to stop public spending (this works as the cost of borrowing goes up - less people likely to borrow, and also the benefits of saving increases). If people aren't buying, producers cannot keep costs high and thus decrease them to curb inflation.

But this method hinders the economy - businesses certainly suffer. Also no one can get on the property ladder and mortgage borrowers find themselves paying more. To boost the economy, the Bank of England would reduce interest rates. But to do this would raise inflation through the roof.

With the current economic climate, the Bank of England can't afford to either raise interest rates (to curb inflation) or lower them (to boost the economy). It is literally being stuck between a rock and a hard place.

I think I was sober when I started this post, I can now say I'm not. This must be my longest ever post. Sorry to bore everyone, but I'm nuts about this sort of thing.

There will always be opportunities to make a killing in the market. My God, the market was below 1,000 in 1981; look where it is now and where it has been. The Dow is just one measure of the stocks viability, and therefore, the economy's. Keep in mind that the Dow is only an average of 30 stocks. Ours is a $15 trillion economy. That is economic power.

I know the stocks on the Dow has reached over 300 points on one day, but the next it could drop over 400. Its all too up and down to make many thousands. If I seem a tad unknowledgeable about the Wall St market , then thats because I'm British and I do not know too much about the markets worldwide. I tried to break into the markets last year, but thing after thing kept happening and I thought "f**k it, whats the point", I still havn't invested. Even a case of the "Bear Market" happened which means that my investment at the time of starting up would have lost all its profit. I was born in the wrong time and I've missed my chance, while those investors were celebrating heavy gains in the 80's, I wasn't even 10.
Theres now too much unpredictibilty and uncertainty, especially after this damm C C and trusting institutions that you havn't yet invested in yet seems a tad too much.