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News Nightmares & Bank Debacles

September 16, 2008

Stock Exchange

So this is the question of the hour: What is going on? Or maybe the better question is: What got us into this mess? The real answer is a perfect storm with many moving parts acting together to drag down the financial markets. The more simple answer, although not necessarily the entire cause, is leveraged debt.

For the past few years anyone and everyone could buy a home. Not only could they buy a home, they could very possibly buy a home that they realistically could not afford. Many banks and lending institutions were issuing 100% financing with nothing more than proof of a pulse. Fueled by easy mortgages, the demand for homes increased. Simple economics, aka the law of demand, tells us that if demand increases at a rate faster than supply, then price will increase. Therefore, home prices were increasing rapidly. Because of this, banks were not overly concerned with issuing loans to individuals with less than acceptable credit. Their general thought was that real estate values cannot go down. There is a limited amount of land and no more is being made, so therefore all current prices are set and they cannot decrease. Obviously, this thought process was flawed. Real estate values have gone down, and now banks are sitting on a surplus of homes that they cannot get rid of. So what does this have to do with Merrill Lynch, Lehman Brothers, or Bear Sterns?

Listen to the show today and I will explain how the mortgage crisis ties in with these major investment banks. Not only do I go further into the current state of the financial markets, but I also share some strategies that can protect your portfolio from being greatly affected by economic cycles such as this. I also touch on my feelings towards the popular media and what contribution they are making to our economic situation. I cover some very interesting research reports, and also discuss why right now might be a great time for those of you in your 20s, 30s, or even early 40s.

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