If you hadn’t realized, 2017 ends with a 7. And whether you believe in superstitions or it’s just plain coincidence, most crises in the past began in years ending with the number 7. Some of the biggest financial crises our country and the whole world has faced happened in 1987, 1997 and 2007. If that doesn’t make you pucker up just a little bit, let’s take a look at what we are going to expect this year.
First, Let’s Backtrack
Let’s take a quick recap on the previous crises first; starting with the one we call the “ Black Monday”. This happened on October 19, 1987; a Monday. The world stock market came crashing down late Sunday night in Hong Kong, swiftly hitting the U.S. the following day.
The next major crisis was in 1997. This happened when the Thai Bhat (Thailand’s Currency) collapsed and the Thai economy had declared bankruptcy. This collapse easily whiplashed and posed a threat with global proportions. Although the United States market didn’t collapse, but it was gravely hit. Years after, the Asian Financial Crisis (also known as the “Asian Flu”) caused the housing bubble and the subprime mortgage crisis.
Many deemed the 2007 global financial crisis as the worst following the 1930’s Great Depression. The U.S. subprime market was in such a bad shape that it became a full-blown macroeconomic banking crisis on an international scale. To prevent history from repeating itself, the U.S. government enacted the Dodd-Frank regulatory reforms.
What’s in it in 2017?
No one can be certain as to when a crisis could happen. The big international banks are stronger now than they were before the last crisis happened. And while this is true, there are still present risks that, after slowly building up, may precipitate into the next risk. Risk such as the unsettled political climate in the country may impose a great problem.
Lawrence Summers, the former U.S. Secretary of Treasury, said in an interview with Fox News, “The deregulation in some areas like finance is hugely dangerous”. This deregulation is one of U.S. President Trump’s policy plans before he formally took office. Summers stated that this can trigger a crisis.
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Combined public and private debt percentage is at an all-time high, making up 225% of the world’s gross domestic product. And, although debt powers growth, it also makes borrowers fragile. This means that if borrowers keep owing money more that their ability to repay their debts, there will be a great risk of default. And if they default their loans, lenders, in turn, will face great damages. This may follow a ripple effect.
Low-interest rates are something borrowers would be happy about. This means that if you think of getting a loan to pay your mortgage or to purchase a home, this could probably be the best time. Banks, though, may not be as happy. Low interest means banks would be having lesser profit to cushion themselves in case anything happens.
So far, the financing equilibrium is still in a good balance. There are some prerequisites, though, that seem to fall into place that might tip the balance. And whether another crisis is well on its way – Well, maybe not this year, but the odds are good.
More importantly, What’s in it for you?
Debt is debt, whatever you call it. And debts need to be repaid. While it is good to take advantage of getting a loan while interest rates are low, you have to be sure to get one that you can afford.
For sure, a couple of missed payments will seriously hurt your scores. In a bigger scale, these missed payments and, worse, loan defaults will create that ripple effect that can catapult into a crisis. And what happens during a crisis? Loans become more expensive, interest rates will be really high, mortgage prices will possibly double and unemployment will be rampant. These things can possibly happen.
Educate yourself about loans before jumping into murky waters. If it helps, shop for lenders and ask them all the questions you need to ask. Do not just settle on knowing one type of loan. Other loans such as subprimes may work better for you than any other in the market. Evaluate their offers, assess if you can afford the loan they offer. If you look for loans you can very well afford now, then you may afford it in the uneventful crisis. If you are having difficulties paying for it now, who knows what can happen when the crisis comes.
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