Inside the Money Crisis
by David Coffin
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With federal regulators taking over the third largest bank failure in history, IndyMac, it makes us reassess the very foundation of our cheap money society. Interest rates have been historically low, and financial institutions have seen this as an opportunity to leverage their positions many times over. This leveraging, poor lending practices, and the general downturn in the economy have led to the federal reserve to putting more than 89 banks on a list of potential insolvency.

Many wonder if Fannie Mae and Freddie Mac are among this list of financial institutions affected by the money crises. But, just Sunday, the Federal Reserve issued a press release giving the Federal Reserve bank of New York the authority to lend to these two banks if necessary, at least temporarily insuring their solvency.

While the consumer debt and over leveraging are hurting the American economy, one might think that huge financial companies would be more responsible. Not so. Many of the American, and world, financial institutions have leveraged their capital into CDOs or Collateralized Debt Obligations losing out as the credit market declines. The irresponsible lending and investing of financial institutions has led the Federal Reserve to consider greater restrictions and regulations on financial institutions. This is the first time in American history that the Fed has taken such a role.

While the effects of a spiraling financial sector might not hurt the majority of the population. Anyone with under $100,000 in their account is insured by the FDIC or Federal Deposit Insurance Corporation up to $100,000. But, anyone that has bought a home, invested in the market, or that is keeping accounts with more than $100,000 is deeply affected by the new money crises.

This financial disaster came at a time when natural resources are at all-time highs. The price of oil just hit an all time high in inflation adjusted dollars, while eastern countries are buying record amounts of copper, steel, oil, concrete, and other commodities. The American government is in trouble when consumer debt is out of control, mortgages are defaulting, financial institutions are insolvent, lagging exports, the government has huge amounts of debt, there is a massive trade deficit, and we are fighting a war to boot.

If the Federal Reserve raises interest rates inflation will be slowed, but at the cost of slower growth. If the Federal Reserve keeps interest rates at the current levels we will see inflation and devaluation of the dollar. It's clear that Ben Bernanke, Federal Reserve chairman, has his hands full in keeping the economy balanced, and he still has the time to bail out failing financial institutions.

It is clear that all indicators show a continuation of the money crises in America. But, before you sell your house and buy a one way ticket to Hong Kong, consider diversifying your investments. Not just across different sectors, but across different countries, and maybe different banks. Think about working for the next growth sector such as health care. Look for ways to save a few bucks. Decrease credit card debt. With a lot of work, and a little luck, you might be able to ride out the depression with less exposure to the money crises.