First, the bad news. The credit crisis is spreading beyond mortgage backed securities. As banking failures in Europe illustrate, the problem is a much wider one. Banks lost their perspective on default risk and lent money at rates that were far too low to borrowers who did not meet the creditworthy test - individuals, corporations and businesses. As borrowers default, loan portfolios are being savaged around the world and the banks that were most aggressive about seeking out growth are facing the consequences. Banks spread their pain around and there is no way that the global economy will not feel the pinch. At this stage, the question seems to be no longer whether we are in a recession but how deep and long the recession lasts. The failure of the bailout bill also illustrates the precarious state that markets are in: we are really in trouble when traders on the floor are watching congressional vote tallies and reacting to the success and failure of legislation.
Second, the neutral news. So what do I think will happen next? There will be congressional action, though I am not sure whether the action will be necessarily in the long term best interests of either Wall Street or Main Street. The market will have its relief rally, just to show that it is playing along.
So, what is the good news? Investors, consumers and economies are a lot more resilient than we give them credit for. While the great depression seems to increasingly be a theme in business news stories, I think that the modern global economy can weather the storm and come out of it intact. My suggestion to you is to think long term (if you can afford to) and invest in companies with healthy balance sheets and solid products. The Coca Colas, Apples and Nestles of the world will still provide long term value.
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