Learning From The Economic Downturn

To say we've been through some tough financial times recently as a nation would be an understatement. Almost any financial advisor will tell you we're in unprecedented times right now, a decade of economic instability not imagined since the Great Depression. Analysts issuing financial advice must now reevaluate the new landscape and that seems to be the case across the board. Clearly, it's necessary for us to be boldly confident as we move forward, otherwise we risk relegating future generations to even more economic uncertainty. But it's equally critical that we take a look at the reasons for the precipitous decline of America's financial engines so that we can learn from the mistakes made. Here are the reasons for the situation we're in:

The housing bubble popped and sent our financial institutions crashing and burning. For decades, a confluence of factors built like volcanic magma beneath the sea floor. Easy credit conditions, bad underwriting, and predatory lending (like sub-prime lending) created the biggest housing bubble in American history. When these bloated, toxic loans weren't paid back or purchased it led to both historic foreclosure rates and the massive instability of our financial institutions, causing the collapse of AIG, Merrill Lynch, Goldman Sachs, Fannie May, Freddy Mac, Stanley Morgan, Washington Mutual and the Lehman Brothers. The result of this has been the lowering of the US credit rating and the epic devaluation of what used to be the symbol of the American dream—the home.

Wall Street is faced with a new regime of regulations and lower returns. This time it may not be part of the cycle. Many stock market analysts say the proverbial train has gone off the track and may not ever return to its previous course. Because of new rules enforced after the bursting of the housing bubble, banks now have to producer higher levels of equity in order to balance risky assets. Most options for doing this will result in significantly lower returns, leading to many major corporations to embrace job cuts, outsourcing, deleveraged assets, and weaker markets. Even if Wall Street does make an epic return, the age of 'the market' being seen as the great economic stabilizer is over.

If we treat these as teachable events, it's possible to use the recent economic downturn as a way to redirect the future. The innovation and ingenuity of American entrepreneurship has bailed us out before and it can again if we take seriously the reality that markets require a constantly shifting balance between regulation and freedom. There's no silver bullet here, but that doesn't mean we shouldn't reload—our economy, that is.

Europe’s Debt Crisis Causes Fluctuations in U.S. Treasury Bonds

The twists and turns of the ongoing European debt crisis, coupled with the knowledge that its outcome will have considerable implications for economies worldwide, has had a direct impact on American financial markets. When hopes of a deal are high, and one appears close, the U.S. stock market rises in approval. Conversely, whenever the situation starts to looks especially bleak, the stock market responds with an accompanying fall.

The same has been true of U.S. Treasury bonds. Whenever Europe appears hopeless and the stock market is down, Treasury bonds serve as a haven for worried investors and rise accordingly. This process was on full display this past week: after a meeting of European finance ministers was cancelled, speculation swirled that the major leaders in the Euro zone were not on the same page. As a result, bond prices immediately responded and began to trade higher. The 10 year note went 1 2/32 higher to a yield of 2.111%, while the 30 year bond jumped 3 1/32 to yield 3.13%. The two year note had a more moderate 2/32 rise to 0.255%.

When the European crisis hasn’t been hitting the news, Treasury bonds have actually trended downward in recent weeks alongside reports of an improving U.S. economy. With rises in job and consumer confidence data, the stock market showed signs of health at the expense of Treasury bond yields. But these improvements are still being stymied by an overall lack of investor confidence, and analysts predict that Treasury bonds will continue fluctuating until the European crisis is resolved.

At the core of the European debt crisis is the dire financial straits of the Greek government. Europe has already given Greece one bailout, and now it looks that the country is going to need another. But there are other problems as well: the Portuguese and Italian economies are also greatly struggling, European banks are burdened by national debt, and some countries are questioning their membership in the Euro zone in the first place.

As is often the case, politics has played a role in the negotiations. Although Germany and France – the two most important economies in the talks – have put their weight behind a plan that sets up emergency funds, supports the Italian economy, and restructures the Greek debt, there are many small points of disagreement and countries that are unwilling to go along. In Italy, Prime Minister Silvio Berlusconi is mired in a political struggle and has refused to make the commitments that Germany and France seek.

The outcome of the European crisis, then, is still to be determined. All we can say at this point is that U.S. Treasury bonds will continue to fluctuate alongside the roller-coaster negotiations.