2007-2009 Financial Crisis Cost Tax Payers $30 Trillion

2008 has come and gone and feels like a distant memory. The economy is back on its feet and the banks which were basically devastated because of the crisis or responsible for creating the crisis are in the best of health.

So it begs the question: “How Bad Was It? Well, I just finished reading a research paper from the Federal Reserve Bank of Dallas; entitled: How Bad Was it? The Costs and Consequences of the 2007 to 2009 Financial Crisis.” And in the report, the researchers estimate that the recent financial crisis cost our nation $6 to $14 trillion in losses using standard estimates but using other reasonable assumptions, the loss may be closer to $30 trillion if you add in other long term costs directly related to the financial crisis. So what is this loss relative to the size of the U.S. economy? As of the latest figures the size of our economy is over 16 Trillion dollars. So the loss was huge. More on this later.

Breaking down the $6 to $14 trillion loss estimate is based on a differential – between what the economy is and what it could have been without the financial crisis – so, of course, this estimate is based on a lot of assumptions – but even so, it’s the first analysis I have seen on the cost of the financial crisis. And it’s important because it tells us how expensive… government policy decisions can be… for American taxpayers… because if you divide that cost across all tax-paying American households, it translates to $50,000 to $120,000 per US household at the basic level. And that’s just a conservative estimate.

The study also points to a dramatic drop in total wealth due to lower wages as a result of the jobs disruption caused by the crisis – with US household net worth down $16 trillion from mid 2007 through the beginning of ’09 – because roughly one-fourth of all household wealth evaporated in a matter of month. How did it evaporate? Through lower portfolio values, lower home prices, lower money in the bank which shook household confidence severely. And on this point – the point of total wealth and net worth – seniors were hit particularly hard – not only from the drop in the value of their stock and bond portfolios, but through the lower interest rates which were necessary to keep the economy afloat. I don’t have to tell you how this low interest rate policy represented a significant loss of income.

In addition to the financial impact, there are also the psychological costs of joblessness beyond lost income. During this recession, more than 8.7 million workers lost their jobs and faced extended bouts of unemployment. By June 2009, 12 million working Americans were either unemployed or underemployed – with low paying or part time jobs that were below their skill level – and many became so discouraged that they just stopped looking for work altogether. This creates psychological burdens that go far beyond lost income – burdens-such as the cost of being forced out their homes for not making mortgage payments, having to forcibly split family units to make ends meet, and so on.

Data also shows that the average number of households formed – through marriage or partnership – dropped to a third from 1.5 million per year to merely half-a-million – mostly because many working-age children who would normally go out and stay independent, opted instead to staying with their parents to weather the downturn.

Also consider that this lack of employment has meant more unemployment payouts by the government – the government uses borrowed money which increases government debt just at a time when less tax money is coming in. This causes government debt and budget deficit levels to expand as the Government scrambles to get money to people who don’t have jobs.

So while the government did step-in with unprecedented fiscal and monetary action to prevent a full-blown depression, such intervention had significant costs such as a swollen federal debt, an expanded Federal Reserve balance sheet and increased regulation for years to come, which attempts to put in place new banking controls so a similar crisis would not happen again.

So when you add it all up in dollar terms, the loss will likely be closer to $15 to $30 trillion from wealth reduction, with up to $14 trillion more for national trauma and lost opportunity and $12 – $13 trillion in extraordinary government support. And that’s without counting the repercussions of this crisis abroad.

The Dallas Fed report also cites damaged public trust in government-supported institutions and the capitalist economic system – where too big to fail financial companies that precipitated the crisis were given massive dole-outs and preferential protection – and walked away largely unscathed by the crisis they were largely responsible for creating/// while losses, unemployment and significant lifestyle disruptions were disproportionately borne by taxpayers.

So, coming back to the question of how much the crisis cost in easier to understand terms, The Dallas Fed puts the loss at 40 to 90 percent of the entire 2007 output of the United States.

Putting it another way, we lost about 1 whole year of economic output. One whole year.

This is basically why the economy has taken so long to recover back to its former levels, and no one knows exactly how long it would take to totally heal from such a devastating blow.

So when collective circumstances and actions – such as bad loans by banks, rating agencies failing to do their jobs, lax regulatory policies, reckless lending, low interest and easy credit – when these collectively cause havoc, they impact the economy over the long run and we all pay a very significant price – individually and collectively as a nation. So my hope is that my listeners – American taxpayers – understand that policy decisions and private actions tremendously impact our lives and it pays to be sure that your own financial house is in order. You may be able to count on the economy for a while, buts it’s entirely up to you to understand what is in your control and what is not. And to make the right money decisions to protect you from events that are not IN your control.

This means creating a savings pool, investing wisely, spending reasonably and thinking and preparing for the future. If you had done this well, the distressing circumstances which almost brought America to its knees, may not have had as devastating effect on you as it did on so many others. And this, my friends, is what it means to live your one best financial life.

6 Aspects of Understanding the Foreclosure Inventory and 2008 Financial Crisis

The US suffered an untold financial crisis in the year 2008. This led to the worst economic recession the nation has witnessed since the World War II experience. The crisis virtually affected all aspects of the US economy. The real estate business suffered a setback. The foreclosure inventory trend also declined. A clear understanding of the foreclosure inventory and the 2008 financial crisis is very vital. There are 6 vital aspects to consider. Let’s examine them now.

1. The trend of Foreclosure Inventory in 2008

The trend of the foreclosure inventory has been going down ever since the 2008 September financial crisis. There have been over 3.5 million completed foreclosures since the days of the crisis. Lots of decreases have been noted in the quarterly and yearly reports on foreclosure inventory. The number of loans in foreclosure inventory, decreased by 6% as at March, 2012. Of all the homes with mortgages, an approximate number of 1.4 million homes were seen in the March 2012 national foreclosure inventory as against the 1.5 million homes involved in the previous year.

2. The 2008 Melt Down

To understand the reason for the declining state of the foreclosure inventory, a look at the 2008 financial crisis is very important. Actually, the crisis began in September of the same year. It led to a major recession in the US economy and also caused economic meltdown in many other nations. In the same September 2008, the Lehman Brothers which is one of the World’s largest investment banks failed. The US stock market also went down drastically. Several big companies in the US downsized the number of their employees. The entire US economy came under great attack by the recession. This affected several areas of the economy including real estate and foreclosure deals.

3. Causes of the 2008 Financial Crisis

Several factors led to the 2008 financial crisis in the US. Market instability is seen as the one of the major factors. There were severe changes in the creations of new credit lines. This caused retardation on the economic growth and also dried up the money flow. Cheap credit access is also another factor that led to the crisis. People found it very easy to access credit loans for buying houses and making investments. The cheap credit system made more money available and hence caused people to spend money as they want. This later caused economic crisis in the financial sector.

The 2008 crisis went from bad to worse when greed set in. Many people in government got rich quick while the poor masses suffered in the process.

4. The Impact of the 2008 Financial Crisis on Foreclosure Inventory

The 2008 financial crisis left negative impact on the entire US economic. Virtually every aspect of the economy suffered the heat. In the real estate sector, lots of setbacks became apparent. The housing market declined. Access to mortgages skyrocketed. Many people who borrowed money from lenders couldn’t repay back the full payment. This led to foreclosure cases. In any case, the foreclosure inventory kept decreasing as seen in many states.

5. Foreclosure Inventory in Various States

Since the days of the 2008 financial crisis, the inventory has continued to decrease. The highest percentage of foreclosed assets was still very low in various states as at March 2012. Some states had higher percentages rates. Florida had 12.1%, New Jersey had 6.6%, Illinois had 5.4%, and New York had 4.9 % while Nevada also had 4.9%. The trend continues in many other states. Some states had the lowest percentage of foreclosed homes. Among them include Alaska with 0.8%, Wyoming with 0.7 % and South Dakota with 1.4% and Nebraska with 1.1 %

6. The Way Forward

the final point to consider in this excursus on understanding financial inventory and the 2008 financial crisis is the actual way to make things right. It’s very clear that the foreclosure inventory is coming down. To help the system, loan modifications should be introduced. The use of deeds-in-lieu and short sales should also be encouraged as best alternatives to foreclosures. This will help in ameliorating the impact of the 2008 financial crisis on foreclosure deals.

Asian Financial Crisis – How to Learn From the Past

The 1997-1998 Asian Financial Crisis: How Did Asia Fall?

The great 1997 Asian Financial Crisis (AFC) affected most countries in Southeast Asia as well as other Asian countries. During the times of trouble, people in the AFC affected countries feared that the crisis would spark a global economic meltdown.

The starting point of the monetary crisis was the collapse of the Thai baht. In 1997, the Thai government’s decision of floating the Thai baht resulted in a financial collapse of the currency. While Thailand failed to maintain the value of its currency, the country’s economic condition was degrading significantly. The crisis resulted in layoffs in several sectors such as construction, real estate, and finance. Around 600,000 foreign workers and a huge number of local workers lost their jobs following the national crisis. January 1998 was Thailand’s lowest point; the baht reached its lowest rate of 56 to 1 US dollar. Meanwhile, before the crisis, the rate was 25 units to the dollar.

In Indonesia, severe financial crisis hit the country in August 1997. The government did not see this coming because in June 1997, the monetary condition of the country was at its best. The sudden crisis was triggered by numerous protests against the incumbent government. Political instability soon led to an awful financial and national security crisis. Intense devaluation started to develop in November 1997 and reached its peak in early 1998. The country lost 13.5% of its GDP in 1998 and the rate of the Indonesian rupiah plunged to 14,000 to 1 US dollar while before the crisis, 1 dollar only cost roughly 2,600 rupiah.

In South Korea, the crisis was also known as the IMF crisis. While the macroeconomic fundamentals of the national country were stable, many South Korean banks were burdened with non-performing loans in order to fund aggressive expansion of large companies. Huge establishments such as Kia Motors, Hyundai Motors, Samsung Motors, and Daewoo Motors asked for excessive loans and failed to return their debts. In 1998, Kia Motors was taken over by Hyundai Motors, Samsung Motors was liquidated, and Daewoo Motors was sold to the US-based company General Motors. At the same time, the value of the South Korean won continued to decrease. From the normal rate of 800 won to 1 US dollar, the rate decreased to 1,700 won to the dollar.

The People’s Republic of China was one of the few Asian countries that remained unaffected by the severe financial crisis. China’s renminbi (RMB) remained stable with the exchange rate of 8.3 RMB to 1 US dollar. RMB’s non-convertibility policy actually protected the currency from speculators that it helped China become one of the few Asian countries with the strongest financial stability. However, although China did not suffer from currency rate fluctuation or deficit in GDP, the AFC did slow down the growth of China’s GDP. To overcome this issue, the Chinese government soon implemented new policies to overcome the country’s financial weaknesses such as relying mostly on trade with the United States and having too many non-performing loans.

Unlike China, Japan was pressurized by the AFC but did not collapse. This is due to the fact that about 40 percent of their exports were aimed at Asian countries. Due to the crisis, most of these countries had to cut back on their imports and thus this affected Japan’s economic condition. To overcome this problem, the products that were supposed to be exported to Asian countries were sold massively, which caused the rate of the Japanese yen to fall to 147 yen to the dollar. From 1997 to 1998, Japan’s GPD continually dropped from 5% to 1.6%. Even worse, in 1998, recession occurred due to heavy competitions between manufacturers, which lead to more bankruptcies.

On the other hand, other countries in Asia such as the Philippines, Hong Kong, Malaysia, and Singapore also underwent financial crises. In general, these countries suffered from GDP deficit. While the Philippines suffered from 3 percent GDP deficit, Malaysia lost 5 percent of its GDP during the AFC.

IMF’s Confession of the Wrong Handling of the 1997 Asian Financial Crisis

During his Asian tour in February 2011, the managing director of the International Monetary Fund, Dominique Strauss-Kahn, confessed IMF’s mistake in handling the 1997 and 1998 Asian Financial Crisis in front of the president of the Republic of Indonesia, Susilo Bambang Yudhoyono. While handling the crisis, the organization did not take into account about the differences in political and historical condition of each Asian country. As a matter of fact, those differences are significant as different issues require different handling approaches. During his speech, Strauss-Kahn said that the IMF did some things right but he also humbly admitted that “we also did things wrong, and we have to accept this”. By accepting the mistake, Strauss-Kahn also meant that the International Monetary Fund has learned a lot from the AFC.

How to Prevent the Financial Crisis from Recurring?

To avoid the AFC from recurring, Asia should learn from the past. As Asia progressively develops, competition is never static in this region. Many things have to be improved and reformed due to years of delay. For these reasons, we cannot take for granted the current momentum of Asia’s economic growth as well as the surfacing markets. Indeed Asia still relies heavily on imported goods and technology from developed countries. Yet, if economic performers in Asia are not careful enough to stick with themselves in the trade cycle, this region may experience another financial crisis.

Looking back, the AFC was triggered by various factors such as too much leverage in the corporate sector, bad credit management, and weak macro-management in handling problems like capital markets, monetary policy, and fluctuating exchange rates. Another causal factor of the crisis was governmental issue, which was also referred to as crony capitalism.

Based on Dominique Strauss-Kahn’s statement regarding IMF’s mismanagement of the Asian Financial Crisis, we can see that the large portions of advanced countries ignored the real factors which triggered the AFC from happening. Without real handling of the root problem, flawed macro-economic theory, lax fiscal policies, weak financial supervision, and insufficient monetary policy over an eagerly developing continent will be fatal.