What’s behind the crisis, and what needs to happen to restore confidence?
Subprime. That one word has been everywhere for the past year or so (if not more), and the United States, not a group of foreign mythical lands somewhere hiding under a giant umbrella known as emerging markets, is to blame. That and a few other ingredients in the risk recipe–such as excessively-sophisticated financial products, excessive liquidity, and overextended institutions, have come to create this terrible situation now facing the money machine around the globe.
The mortgage subprime market, which seemed like a great idea (especially if you were one of the bright-eyed, house-deprived renters who normally could not afford to buy a dream home using a typical credit score and actual verification of your income), has come crashing down, and there is collateral damage. Investors have lost confidence, and are scrambling to put their money where it won’t disappear.
The problem is now a global one. If you’ve been watching your 401Ks and your stock portfolio rapidly shrinking, you may have to get used to it. Or switch to safer bets. Or, like a lot of people in the same situation, you may just look away.
Because of excess liquidity in recent years, and because of the low interest rates that accompany that excess liquidity, investors have been seeking high yields and, unfortunately, they have been finding them in risky instruments. Naturally, with those risky instruments comes greater risk and, eventually, as we have all seen, the perfect storm comes and everyone starts running.
Transparency, lower risk assessments, and lax credit practices are three of the main elements to figuring out how we got to where we currently are in this financial crisis.
How do you fix the current financial crisis?
Improving industry practices and standards is clearly the answer, but it’s an answer that maybe has come a tad too late to even curb the current situation. There needs to be improved regulation, and there needs to be some serious compromising between the private sector and the public sector, because they are so interrelated that any misunderstanding of this can be too detrimental to not only our economy but as we have seen, the global economy.
It will take time for the markets to recover. We have been hit, but we are still on our feet, however wobbly our knees may seem. We will restore investor confidence, and we will return, eventually, to prosperity. But there are lessons to be learned. And we must learn them.