What A Mess

There is no doubt that our economy is in a mess right now. Some, like former Fed Chairman Alan Greenspan, are saying it is the worst it has ever been since the Great Depression. So how did we get in this mess in the first place?

There have been countless articles written about why this happened but it really boils down to just two things:

1. People in the finance industry developed new "products" that allowed people to obtain loans much easier than was possible in the past;
2. The American Public was never formally educated about finance, how a loan works, how to calculate monthly payments and what is really necessary to purchase a home during any part of their government mandated "schooling."

Now, each "group" shares blame for the problems in our economy. Nevertheless, the people in the financial industry had more education and understanding about what they were "selling" and must have realized that although the commissions they were making were terrific, at some point these loans would go into foreclosure because the individuals borrowing the money did not have adequate means to maintain the payments.

Now these new types of "products" the banking industry developed were much more complex than a standard 30 year fixed mortgage. The phase "NINJA loan" has become part of the American lexicon to describe the most irresponsible of them all. Loans were given to people with No Income, No Job or Assetts. Ridiculous? Absolutely but it happened routinely most often because the person requesting the loan "didn't know what they didn't know."

I am sure many people were very excited to learn that the house of their dreams was somehow miraculously within their reach. What the did not understand was how their payments would change when the interest rate changed on their adjustable rate mortgage (ARM) or how much cash they would need when the balloon payment was due. They simply moved into their new home and began living their fantasy for real.

So all of us are now paying for decisions made by people who lacked integrity and took advantage of folks who made decisions and lacked education. It is highly unlikely that any of us will be able to insure that integrity becomes the cornerstone of our society anytime soon. Our only choice to prevent something like this from happening in the future is to educate ourselves and each other so we know what we "should" know and are not all so easily duped.

Will our economy recover? Without a doubt. If nothing else, the American people are a resilient, rugged bunch that persevere and perform well in a crisis. But the recovery is going to take quite some time; trust has been broken and that is not something that is restored overnight. In the meantime, we can all help prevent something like this from ever happening again through one simple action: education. Make sure your kids understand finance, loans, budgeting and how to manage their money.

We may not see 20% stock market returns again but I would much rather have 8% consistently over time than a "shot" at 20%!