In: Root » » Loans and mortgages
Personal Challenge Policymakers won't enact all the reforms on my top-ten list soon; nevertheless some substantive policy changes are coming. The financial and economic damage emanating from the subprime financial shock is a powerful catalyst for change. The mortgage lending industry will face new rules, and Wall Street will live with new standards and oversight. Work will also begin on making the regulatory framework more effective in a globalized financial system. Financial institutions and markets have also begun the task of repairing themselves. Wall Street is reengineering the subprime loan (soon to have a new name) and is refashioning the process of securitization. Banks are feverishly writing off bad loans and raising new capital. Funds are raising billions from institutions and wealthy individuals to prepare to buy up distressed properties and securities. Policymakers' efforts along with investors' renewed enthusiasm will eventually prevail; financial markets will settle and the recession will end. Although the next financial crisis is not in sight, there is no question that another one will arrive eventually. If there is one lesson the subprime financial shock teaches, it is that that no matter how sophisticated financial institutions, markets, and products become, those animal spirits aka hubris cannot be kept down long. Future generations will come again to believe that this time things are different but will ultimately overstep. The most daunting challenge is thus a personal challenge. We must each prepare for the next financial crisis by carefully considering the condition of our own balance sheets. No longer can we count on rapid gains in stock and house prices. Lenders will be less forthcoming with credit, particularly to those who already have taken on their share. Social Security and Medicare benefits will almost certainly be cut for most of us. We will all have to save more and be more careful how we invest. Instead of piling into the next new thing, we should be diversifying away from whatever is appreciating quickly. These are simple principles that have long been the basis for sound personal finance as well as of high finance; principles that many of us seemed to forget in the frenzy that produced the subprime financial shock.
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