As I have been talking about the stock market over the last few days, you may have had some questions about how the stock market works or wondered about some terms that were used. Please feel free to post your questions and I would be happy to answer them.
Another great resource for digging deeper is Yahoo Finance. On the top, you will see the tab "Investing". When that drops down click on "Education". There they go over a lot of basics and even further if you wish. The "Personal Finance" tab also gives a lot of good advice.
This is also a great website if you are interested in tracking specific stocks or reading articles about the financial markets.
Showing posts with label stock market. Show all posts
Showing posts with label stock market. Show all posts
Wednesday, October 22, 2008
Tuesday, October 21, 2008
Economic Downturn: Part III
The most talked-about topic over these last few weeks has been the 700 billion dollar bailout/rescue plan that was proposed by the President and passed by Congress. I must admit, I have been dreading this post because I have yet to make clear sense of it in my own mind. Even my dad, to whom I look at times to glean economic and financial wisdom, said "Good luck with that one".
The first question is, what is the need for the bailout/rescue plan? What would happen if no plan were put into place?
I should preface with the fact that the amount of money a bank is able to loan out is regulated by the Federal Reserve System (The Federal Reserve System, or The Fed, is the central banking system of The United States, headquartered in Washington, D.C.) based on the amount of cash and the value of assets owned by that bank. As I mentioned in previous posts, the value of investments held by large investment banks has fallen dramatically, largely due to foreclosures and declining home values. Therefore, banks are not able to loan out as much money as they try to balance their assets to loan ratio. When banks become more strict in their lending policies, it becomes more difficult for someone to purchase a car, get a home loan, or receive a small business loan. You can imagine how this effects the auto industry and home construction industry. But this also keeps new businesses from starting or expanding, resulting in fewer jobs being available and so on.
Add to this the general fear that people had about the future of the economy. People were wanting to pull a lot of cash out of their bank accounts just for safe keeping. Cash is an asset for banks, and when their cash levels decline, it only worsens their lending ability. This is why one of the first things done by the Federal Reserve was to increase the Federal Deposit Insurance Company's (FDIC) limit on insured cash at a single bank from $100,000 to $250,000. (Basically, what it means to be FDIC insured is when you have a savings or checking account, and the bank is shut down or collapses, you are guaranteed to receive your cash up to the FDIC insured limit.)
Without the proposal of some sort of market protection plan, the financial markets' rapid decline mixed with increased fear would have sent our country straight back to 1929.
That brings us to the second question: What do we do now, and/or how should this $700 billion dollars be spent? That question is why I have taken two days to write this post. I have been reading opinions and recommendations from all sides and have yet to form a solid argument. Generally speaking, it has been determined that the majority of these funds will be used to buy up bad mortgages. The government will hold on to the rights of these properties until the values of the homes increase and they can be sold [ideally] at a profit. But how all of this will be played out is yet to be determined.
Phew! I think tomorrow's post will be a little lighter.
The first question is, what is the need for the bailout/rescue plan? What would happen if no plan were put into place?
I should preface with the fact that the amount of money a bank is able to loan out is regulated by the Federal Reserve System (The Federal Reserve System, or The Fed, is the central banking system of The United States, headquartered in Washington, D.C.) based on the amount of cash and the value of assets owned by that bank. As I mentioned in previous posts, the value of investments held by large investment banks has fallen dramatically, largely due to foreclosures and declining home values. Therefore, banks are not able to loan out as much money as they try to balance their assets to loan ratio. When banks become more strict in their lending policies, it becomes more difficult for someone to purchase a car, get a home loan, or receive a small business loan. You can imagine how this effects the auto industry and home construction industry. But this also keeps new businesses from starting or expanding, resulting in fewer jobs being available and so on.
Add to this the general fear that people had about the future of the economy. People were wanting to pull a lot of cash out of their bank accounts just for safe keeping. Cash is an asset for banks, and when their cash levels decline, it only worsens their lending ability. This is why one of the first things done by the Federal Reserve was to increase the Federal Deposit Insurance Company's (FDIC) limit on insured cash at a single bank from $100,000 to $250,000. (Basically, what it means to be FDIC insured is when you have a savings or checking account, and the bank is shut down or collapses, you are guaranteed to receive your cash up to the FDIC insured limit.)
Without the proposal of some sort of market protection plan, the financial markets' rapid decline mixed with increased fear would have sent our country straight back to 1929.
That brings us to the second question: What do we do now, and/or how should this $700 billion dollars be spent? That question is why I have taken two days to write this post. I have been reading opinions and recommendations from all sides and have yet to form a solid argument. Generally speaking, it has been determined that the majority of these funds will be used to buy up bad mortgages. The government will hold on to the rights of these properties until the values of the homes increase and they can be sold [ideally] at a profit. But how all of this will be played out is yet to be determined.
Phew! I think tomorrow's post will be a little lighter.
Saturday, October 18, 2008
Economic Downturn: Part II
Following the government rescue of Fannie Mae and Freddie Mac in early September was the collapse of some of our largest investment banks in the country. On September 15th, Lehman Brothers, a global financial services firm, filed for bankruptcy. This was the largest bankruptcy filing in U.S. history. The biggest factor contributing to Lehman Brothers' collapse was the increasing number of failed home loans that I discussed in yesterday's post. Because of the incredible size of this company and the large effects it had in the financial market, stock prices fell dramatically on that Monday morning. Not only the stock price of Lehman Brothers, but a lot of other financial firms as well. If Lehman Brothers went under, who could be next?
And because the stock market's ups and downs are largely determined by the optimism or pessimism of where the economy is headed, the entire market took a huge hit that day and the days to follow. Every morning for two weeks I was looking at the paper to see which bank might be the next to go.
One financial firm that was suffering was AIG, one of the largest insurance companies in the world. You might ask how an insurance company is involved in mortgages and investments. Good question. In order for an insurance company to maximize its profits, (besides mailing you little pamphlets on how to be a safer driver) they invest the money they receive from their insured clients in many different ways - mortgages being one of them. Apparently, AIG could not find private funding to help them through their hard times, so the government loaned them up to 85 billion dollars for an 80% stake in the business. This is why you, as a taxpayer, now own an insurance company, and why it should bother you that a lot of wasteful spending is going on within the business.
Don't get me wrong. I'm all for private business and for the right of those businesses to pay their employees any salary they choose. But if you don't play by the rules, you're going to get kicked out of the game.
Next time, I will talk about the 700 billion dollar proposed rescue plan and what that means for us as taxpayers and citizens.
And because the stock market's ups and downs are largely determined by the optimism or pessimism of where the economy is headed, the entire market took a huge hit that day and the days to follow. Every morning for two weeks I was looking at the paper to see which bank might be the next to go.
One financial firm that was suffering was AIG, one of the largest insurance companies in the world. You might ask how an insurance company is involved in mortgages and investments. Good question. In order for an insurance company to maximize its profits, (besides mailing you little pamphlets on how to be a safer driver) they invest the money they receive from their insured clients in many different ways - mortgages being one of them. Apparently, AIG could not find private funding to help them through their hard times, so the government loaned them up to 85 billion dollars for an 80% stake in the business. This is why you, as a taxpayer, now own an insurance company, and why it should bother you that a lot of wasteful spending is going on within the business.
Don't get me wrong. I'm all for private business and for the right of those businesses to pay their employees any salary they choose. But if you don't play by the rules, you're going to get kicked out of the game.
Next time, I will talk about the 700 billion dollar proposed rescue plan and what that means for us as taxpayers and citizens.
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