Market meltdown

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There is trouble in the money markets and share markets as a shortage of credit (cash) in the money markets and a growing lack of confidence in the share markets are causing companies and banks to fail. Some companies are facing losses worth millions of dollars as they are no longer able to meet their financial obligations. They are also unable to borrow enough because of the credit shortage.

Contents

Why should I be aware of this?

A meltdown in the financial market eventually spills over into everyday life. With banks holding on to their money, they stop lending as much to customers. Under such circumstances if you want to buy a house or car your choice of lenders will be limited and interest rates high. With less money available in the market, consumers can't spend as much, manufacturers can't make as much and shops can't sell as much.

This situation leads to job cuts, lowering demands further and thereby bringing down production.

All about market meltdown

As prices fall rapidly on the share market investors, including big investors, become nervous and stop making new investments. As investment in companies stop, they have to get their finance (capital) from other sources and the credit shortage worsens.

How the meltdown started

In the United States money lenders allowed hundreds of thousands of people to borrow money at extra cheap interest rates to buy housing. The loans began at a discount repayment level and became higher repayments, which most householders could not afford and defaulted on payments.

Under normal circumstances the banks and money lenders would have repossessed the house and re-sold it. But there were no buyers. With no buyers, the base value of the properties plunged sharply, leaving lenders with billions of dollars of worthless mortgages and difficult to sell houses.

The problem became a global meltdown because most of these US mortgages were packaged into fancy investment products and sold around the world to other investors, both big and small.

Unmanageable losses

The losses for the banks and financial institutions that purchased these fancy investment products are becoming so great and unmanageable that some of them are being forced to close their doors. There is also not enough credit or capital to run the companies. As a last resort these companies may have to sell some of their assets, and as there are very few willing to part with their money under the circumstances, those assets will probably have to be sold at a discount, further worrying investors.

What can I do about it?

  • Experts recommend not to sell your property but hold on to it
  • Selling your shares or investment also may trigger a real loss.
  • As long as you don’t sell it is only paper loss and you have actually not lost anything
  • If you are wondering what to do with your superannuation, it is better to put your money into cash as, because of cash shortage around the world, most banks are offering relatively high returns.
  • However, in the long term shares historically outperform cash investments every time. You can always buy back into the share market when prices have risen again.

Ninety degrees

In spite of the meltdown many fundamentals in the market still remain strong. Corporate profits are decent, inflation is declining, and technically, we're not even in a recession yet. Most economists expect slowing or slightly negative economic growth over the next several months—but nothing like the double-digit declines of the Great Depression in the early 1930s.

References

  • How the market meltdown affects you
  • 4 Market Meltdown Myths