Go to PDF Version | Go to Recent Issues
To save time in the future, you may select one of the preferences below. You may update your eIBD preferences at any time by going into My IBD and selecting Update Your eIBD Preferences.
Set Web-Based Version as Default Set PDF Version as Default Set Recent Issues as Default
Get QuoteSearch Site
Daily Graphs Online
View Enlarged Image
The word "credit" traces its origins to the Latin credo, or "I believe." Profits, paychecks and other rewards animate capitalist economies, but these financial incentives work only because of some basic beliefs — that debts will be paid, that contracts will be honored, that financial data will be accurate, that corporate insiders will act in good faith, that regulators and courts will enforce the laws.
When those basic beliefs waver, the economy suffers, sometimes mightily. In the past decade, private scandal and government laxity led to a loss of faith that crippled lending and investing and helped plunge the U.S. economy into the Great Recession of 2008-09. We're now coming out of the long, deep slump with a palpably different mindset on the financial system and its risks.
The country's transition from easy credit provides the basis for this third installment of a six-part Investor's Business Daily series looking at the post-recession realities for the six drivers that kept the U.S. economy strong and stable from 1982 to 2007. The first two parts looked at technology and globalization; after credit, the series covers the consumer, inflation and government.
During the U.S. economy's extraordinary quarter-century run, money for borrowing and investing was cheap and plentiful. The Federal Reserve's easy-money policies and a global savings glut kept interest rates low. Free-flowing credit helped fuel a period of rapid growth, low unemployment, low inflation and strong productivity gains.
Stock values rose to new heights, with the Dow Jones industrial average posting an average annual gain of 14.8%, including dividends. Book titles grew positively giddy over what may come: Dow 20,000, Dow 36,000, Dow 100,000.
Stocks weren't the only assets gaining in value. Large cities' home prices doubled from January 2000 to mid-2007 — and did substantially better in Miami, Los Angeles, Washington, San Diego and Las Vegas.
Getting richer was never easier. The ratio of total financial assets to disposable income — flat at about 6.5-to-1 for four decades — took off in the mid-1980s, more than doubling to a peak of nearly 15-to-1 in 2006.
The good times bred complacency, perhaps even naivete. We came to believe that asset prices would keep going up. We came to believe that those who ran businesses and managed money were all basically honest. We came to believe regulators were vigilant, dutifully checking corporate balance sheets to protect us from fraud and systemic risks like "too big to fail" financial institutions.
Economy: As the White House proclaims its "recovery summer," Americans are suddenly feeling pretty bad about things. Maybe it's because their can-do spirit has come face-to-face with a "can't-do" government. Given the many serious problems faced by the U.S., the last thing we need is a ...
Barack Obama revealed his goal for the Supreme Court when he complained on Chicago radio station WBEZ-FM in 2001 that the Earl Warren Court wasn't "radical" enough because "it didn't break free from the essential constraints placed by the Founding Fathers in the Constitution" in order to allow ...
Intelligence: The Justice Department's surprise roundup of 11 Russian "illegals" acting as unregistered foreign agents is being dismissed as irrelevant to the Obama administration's "reset button" with Russia. We doubt it. Late Monday, the FBI shut down a major ring of Russian "illegals," a ...
Oppo researchers digging into Elena Kagan's past didn't get the goods on the Supreme Court nominee — but they did get the Thurgood. As confirmation hearings opened Monday afternoon, Republicans on the Senate Judiciary Committee took the unusual approach of attacking Kagan because she admired ...
Energy Policy: The administration plans to use sleight-of-hand politics to sneak through an economy-killing tax on energy as necessary to save the Earth. Make no mistake: Cap-and-trade is a tax every American will pay in every aspect of his or her life. Cap-and-trade is like Jason Voorhees ...
Posted By: WFLD(20) on 6/30/2010 | 1:29 AM ET
In fairness to niteski, the article also states backwards what is represented in the chart.
Posted By: WFLD(20) on 6/30/2010 | 1:25 AM ET
Excuse me Mr. niteski. Your reasoning sounds so rational; however, you have the facts exactly backwards. It is the ratio of reserves to deposits that shot up, the reverse of what you stated. Have another look at the chart.
Posted By: niteski(930) on 6/30/2010 | 12:19 AM ET
Wrong, wrong, wrong. The main reason the ratio of bank deposits to reserves shot up was because reserves dropped so quickly due to loan losses. Prior to the credit debacle bank reserves were growing faster than the market for loans could grow. Since Reserves are a function of profits they grow geometrically while the loan market grows arithmetically. That is why there are booms and busts. The longer time of profitability in the banking sector, the more aggressive the Banks. IBD you blew IT
Posted By: jpdwn(885) on 6/29/2010 | 11:24 PM ET
Credit rules were much tighter in the 70's and 80's before government pushed their social housing agenda. Stick and carrot in the form of CRA penalties and Fannie/Freddie guarantees set a new standard for credit rules. Add the government enabling of packaged mortgage investment securities (CDO's) and you have the intervention consequences we see today. These same bonehead government interventionist policies continue. And so will the consequences.
Posted By: Serfdumb(2415) on 6/29/2010 | 8:45 PM ET
Recipe for deflation, followed by inflation as soon as employment and production picks up again, 'too big to fail' is 'too dumb to survive' - ignore basic laws of nature at your own risk.
To participate in Community areas, please Sign In or Register
Register
IBD's Top 10 stories on the front page and To The Point found on page A2 are designed to give the busy reader a quick, time saving review of all the key business news of the day.
Get QuoteSearch Site
Read Full Article »
