The Worst Financial Crisis Since “The Great Depression”

To sum it all up in one word, unimaginable. The financial events of this week have been nothing less than a roller coaster. I would like to say that I’ve never seen a week like this in the North American stock market in my life, but that would be a tremendous understatement.

Lets summarize, on Monday the American Insurance Group (AIG), one of the worlds largest financial institutions was in such risk of bankruptcy that the US Federal Reserve offered 85 Billion dollars for an 80% stake in ownership. To put this into perspective, a US bail out like this has not happened since “The Great Depression.” On the same day, Merrill Lynch was rescued from Bankruptcy with a buyout from the Bank of America, and Lehman Bros another very large American financial institution that is more than 160 years old was rescued with a 50 Billion dollar bailout. And this doesn’t include other financial institutions in dire straits such as Washington Mutual (the largest Savings & Loan in the US), Morgan Stanley, or Wachovia. With all of this news the TSX was down nearly 600 points, and its US counterpart, the DOW Jones was also down nearly 300 points. It wasn’t until the US Federal Reserve along with the Bank of Canada, and many other Western governments pledged up to another 247 Billion dollars to ad liquidity to the North American markets that the stocks recovered with the TSX up 848.42 points, and the Dow Jones up 368.75 points.

Then on Saturday Sept 20 the US Fed continued its work to try and prevent an all out collapse of the market by announcing an additional 700 Billion dollars in relief. To put all of this in perspective, Forbes.com says that Warren Buffet, the worlds most famous investor and wealthiest man is worth 62 Billion dollars. The amount of aid offered this week to the North American markets is greater than 17 times his wealth.

So what does this mean to you and me? Well the first response by the banks to all of this is to tighten up credit. This means that we will need to save a larger down payment to purchase the house we want. This is likely to bring down housing prices because there will be fewer buyers able to purchase homes, and that starts with the pricier, and more unique homes. Next, those of us with less than 20% equity will have difficulty trying to borrow more money for things like a new car, or home renovations.
In response, now is the time to pay down consumer debts like credit cards, and unsecured loans. Now is the time to put together a personal budget and look for ways to reduce spending, and only if you have a large amount of available cash, now is the time to look for bargain investments.