The Financial Market Crisis

After doing much reading this week in the Globe and Mail, I felt it was time to compile a post to discuss.

I think the general consensus by experts and the average person is that the problem is debt. Globe had a quick interview with Margaret Atwood because apparently she is writing a book about debt. Weird, eh? Also, it seems much of her perspective is biblical. In her opinion, one of the biggest problems is student loans and credit cards. I agree that that is a major problem because that's where young adults are taught that there is an unlimited amount of money to borrow and all you have to do is sign up. However, I think she missed something even more simple, but she addressed it indirectly. They asked her how she learned about money and she answered "From having a bank book at eight years old." Then she mentioned elsewhere in the article that her mom was thrifty and her dad liked buying land. She also likes buying land and although she didn't mention it, I'll be she's a bit thrifty too. So, the real root, in my opinion, is poor financial instructions by parents to their children, or the mistake of the children not listening to their parents. Since 'parent-aged' people are also now having debt issues, I'm guessing it's more of the former than the latter.

Elsewhere in the Globe I read another neat quote: "If you don't get a return ON your money and a return OF your money, you don't know how to run a bank." So true. How under the sun could a) a bank offer a zero-down debt and b) people be dumb enough to take one? Well, 'b' is understandable because people will line up for 'free' things, but 'a' is the more disturbing thing. In my opinion, anyone who would take a zero-down, non asset secured loan where your payments are mostly interest, if not all, should not be offered a loan at all. The 'loan interview', if the institutions were smart enough to even have one, should have been like this:

If we offered you a zero-down loan, even though you have nothing to secure it, it's based on market volatility, your job doesn't pay enough to leave you with any fun money, and it will take forever to actually start paying down the principle, would you take it?

If they answer 'yes' then the financial institution should never loan that person money.

But the problem is that they did! They even encouraged it! I remember when we were buying our home that our 10% down was crazy enough. I borrowed from family to make that percentage higher. Even with 30% down it's painful to look at the interest vs. principle payments every month. The financial institutions were operating in the 'now' instead of looking at historical trends. How could they not know that the housing markets will soften at some point? All of these 'borrow from the value of your home to renovate your bathroom' ads have suddenly stopped appearing. Hmm. Why is that?

It's tempting. As an investor you see all these easy loans around and you think "I'll use that easy money and invest and make more." Well, sure. We can and it's possible. But through this situation, I've learned that one must look at the debt ratio very closely before investing in companies. And a company needs to keep their debt ratio in good shape.

The famous "OPM (Other People's Money)" promoted by Rich Dad is a good thing, however, wisdom and lifestyle sacrifices are needed. Can we pay back the debt on time if the market we're in sputters? Before borrowing money against our assets, we need to ask ourselves if we can service those debts if the value of the assets drop 20%.

Thankfully, like Margaret Atwood, I have a go-getter mom and a thrifty dad. I have the boldness to try, but the thriftiness to consider the implications of a debt. I'm sure that through this that we'll grow in wisdom and be even better prepared for future investing.