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A Decade in Flux: The State of the Markets

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And a look at home prices.

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This post first appeared in the Special Edition: Cirios Trends: A Decade in Flux. For the second article in this series, click here. Keep an eye open for more of the same, coming later this week.


The books are officially closed on a decade which will be remembered for an historic real estate boom in the United States that busted in spectacular fashion, nearly taking the entire world financial system down with it.

Of course, the real story is a touch more complicated: Our housing bust was merely the most glaring crack in a global economy that grew far too dependent on cheap debt, where flows of money around the world magnetized to the hot asset, blowing bubbles first in stocks, then real estate, then commodities.

During each subsequent bust, governments rushed to the aide of markets, stitching them up with a patchwork of looser regulations, low interest rates, and promises it would never happen again.

Late in 2008, the collapse of the credit markets culminated in the failure of some of this country's most storied financial institutions. When the dust settled, Bear Stearns, Lehman Brothers, Merrill Lynch, Washington Mutual, Wachovia (WB), Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG), Countrywide and a host of smaller, lesser known entities had either gone bust or been bought for a song by stronger, better capitalized firms.

Some simply melted into this or that government agency, while many members of our financial complex survived only with historic government aide. Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM), Goldman Sachs (GS), Morgan Stanley (MS), GM, and Chrysler are alive today thanks to massive taxpayer-funded bailouts.

But enough looking behind us; historians and journalists will be employed for decades slicing and dicing this most turbulent of decades.

Surveying the horizon, the primary fear among economists, investors, and ordinary Americans is that the inflationary effects of pumping trillions of dollars into an economy must eventually come home to roost.

To be sure, there are those who remain firmly in the camp that believes the more pressing concern is inflation's less-well understood counterpart, deflation. But even the most ardent deflationists believe theirs is a debate that's more accurately painted as one of time horizons, rather than absolutes.

The US dollar is in the crosshairs of this philosophic, as well as very practical debate. The greenback's standing as the global reserve currency has been thrown into question as investors around the world scratch their collective heads and try to figure out how we'll ever repay our staggering, ever-growing debt.

And now, as our economy appears to be slowly healing, the Federal Reserve faces the unenviable task of withdrawing its generous stimulus. In March, the Fed plans to scale back its purchases of mortgage-backed securities, spooking more than a few market participants.

The fear, particularly for the housing market, is that any Fed pullback will push up interest rates.

Higher interest rates translate into lower purchasing power for buyers, curtailing the steady stream of homebuying demand that, coupled with ongoing foreclosure moratoria, has propped up prices in recent months.

We kick off 2010 with mortgage rates approaching the all-time lows set last spring. Sure, they could always go lower, but the smart money is betting it's just a matter of time before rising prices force regulators to ease their foot off the monetary accelerator. Higher mortgage rates are likely on the horizon.
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