First Person: The Financial Decade in Review

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First Person: More Fun, Less Expense
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First Person: More Fun, Less Expense

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I own a small investment advisory firm in Connecticut and usually look at events from the broader perspective. This is my take on the decade that is leaving us - and good riddance to it!

I would be surprised if anyone could look back at the last decade and not have their brain flood with clichés or meaningless quotations. I am going to borrow from Dickens and say that "It was the best of time, it was the worst of times" because from 2001 we watched the financial landscape in America recover from a dot.com bust, witness the horror of 9/11, proudly rebound and experience economic growth and then suffer an implosion of our financial system and the uncovering of the largest Ponzi scheme that the world has seen.

Is it better to look upon the past on a numerical basis or examine the events that demonstrate our character? Arguably I favor the latter because to choose the former causes us to look past what may make America great - its people.

It can be argued that the decades of the 80s and 90s were great creators of wealth as the average American developed a love affair with the stock market. A love affair with risk was created and from 1981 through 2000 the stock market as measured by the S&P 500 zoomed from approximately 135 to 1341 for a ten-fold increase. One fact about risk is that it is always there, in some form, at times waiting for the cockiness of the investor to forget all about it; and then it pounces.

Cheap money fueled the growth in real estate which led to an increase in home values. As values increased the consumer tapped that equity through loans and used that money to purchase goods such as autos and vacations; maybe even a second home. In other words they were employing leverage.

Leverage is simply using borrowed money to increase returns. If you have 100,000 in cash and invest it and make 10% you have a 10,000 dollar profit. If though leverage the 100k becomes 500K you have a 50K profit of 50% return on your original money. So far so good as long as the value of the underlying assets stay strong.

The decade had at least two recessions, one in 2001 and then another in 07. The recession of 07 was exacerbated by the collapse of Lehman Brothers in September 08. That action rippled though already tottering credit and equity markets causing a further deterioration in valuations. At the same time the availability of credit became a thing of the past and credit is the lifeblood of commerce. The Unemployment Rate soared from 5% to 7.5% as businesses laid off workers which led to delinquencies in mortgage payments which led to foreclosures at a time when the housing market was weak. This led to collapses in the value of bonds collateralized by these mortgages which further eroded confidence. America was in a full blown crisis the likes of which had not been seen in nearly 70 years with unemployment continuing to rise to 10%.

Government intervention was necessary to assist banks and manufacturing corporations and Bailout became part of the everyday vocabulary. The government action did succeed and the economy is on the way to a recovery, perhaps tepid but with little chance of a double dip recession.

The Economic Crisis of 08 will define the decade because in spite of America losing over 20% of its wealth our system did hold together. Congress did its thing and held hearings; the President lambasted people who he thought were to blame and Bernanke of the Fed became a fixture on 60 Minutes.

In December 2008 Bernie Madhoff, a highly regarded Wall Street kingpin announced that his life had been a fraud and he had scammed in excess of 50 billion dollars from investors. Bernie represents greed on all levels, He was a common thief and his victims were looking for that free lunch of which we all know just isn't there.

While the crisis effected us all in one way or another, Madhoff may symbolize what many stand for. Take your pick and when we toast the next decade in let's pray that its values are somewhat better.

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