From the American Funds Newsletter
The current bear market is, in large part, a result of the housing bubble, which was fueled by easy to obtain subprime mortgages, lax regulation of mortgage brokers, housing speculation and exotic investments based on the securitization of mortgages. Experts called it “financial innovation gone wrong and it led to a credit crunch, bank losses in the United States and abroad and worldwide credit turmoil.
So far, the 2008 bear market most resembles the downturn of 1990, when thousands of savings and loans (S&Ls) failed. The 1990 bear market also had its origins in financial innovation and lax regulation, says Mike Shanahan, veteran American Funds portfolio counselor. In the late 1980’s Congress substantially loosened S&L lending standards and let the S&Ls diversify into riskier and more profitable real estate lending. At the same time, federally backed insurance for S&Ls diversify into riskier and more profitable real estate lending. At the same time, federally backed insurance for S&Ls was raised to $100,000 from $40,000. Not only did this trigger a rush of money into S&Ls, but “it also further encouraged the S&Ls to increase risk taking and invest deposits way beyond their competence,” Mike says.
More information on this to come!
Pat Wilson - Thomas, CRS