To make sense of the meltdown and shed light on what consumers can expect in 2009, we turned to Greg McBride, Chartered Financial Analyst, who is a senior financial analyst at Bankrate.com. He shares his insights into the forces that led to the current crisis and offers tips for toughing out these rough economic times.
Q:How did the subprime mortgage crisis lead to the credit crunch, the financial bailouts and the snowballing problems we're seeing across the country?
It started as a repricing of risk coupled with excessive debt, whether it was mortgages to borrowers who didn't document their incomes, or lending to unstable governments or weak companies. Risk is now better reflected in loan terms after having been largely ignored for several years. What happened when risk got repriced, all of a sudden a lot of loans that had been made were no longer being made, such as subprime mortgages. Much like kids jumping off the furniture, it's all fun and games until somebody gets hurt. Then nobody jumps off the furniture. And now nobody wants to lend to risky credit. There have been instances where banks won't even lend to each other, and that puts the whole system at risk.
Q:What effect has the unraveling financial crisis had on business and consumer spending?
Everyone -- businesses and consumers -- are in hunker-down mode now. With so much uncertainty regarding the economy, people are reluctant to spend.
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Q:What is the outlook going forward?
2009 probably isn't going to be a lot of fun for anybody. We're still going to be in recession and probably a deep recession. But there will be some opportunities. Falling home prices coupled with low mortgage rates will continue to attract bargain hunters into the housing market. Home prices will probably continue to decline. They're certainly not going to jump higher, so affordability will only get better.
Q:What lessons can we learn from the subprime crisis?
The first one is the same lesson that we learned with the tech stock bust -- fundamentals matter. The other lesson we're learning is that consumers cannot borrow their way to prosperity.
Companies all over the U.S. are hurting right now and many people are experiencing or fearing layoffs. Looking ahead, will employment levels get any rosier?
Unfortunately, employment is a lagging indicator. We'll begin to see a turnaround in the stock market and the economy well before we see a return to substantive job growth.
Q: How should people prepare financially for a coming layoff?
Build a savings cushion. Knock out any credit cards or other debts with low balances, cut your spending and identify other areas you can cut later if your job is eliminated.
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