The World Health Organization has declared the rapidly spreading coronavirus (COVID-19) a pandemic. This virus began in China and quickly spread to the United States creating not only a healthcare crisis, but a financial crisis. Non-essential businesses have been forced to close, unemployment skyrocketed, and the stock market went into free-fall. The death rate is mounting. The market continued to plunge after the federal reserve cut interest rates to zero. Due to the rapid spread and uncertainty surrounding transmission, major sporting events have been cancelled, universities, libraries and schools closed, and stay-in-place orders imposed. The U.S is now in a recession. We all remember the financial crisis of 2008; it was the worst economic disaster since the Great Depression on all Americans. However, no group felt its’ sting more severely than African-Americans who were already the most economically and financially vulnerable. The biggest winners during these deep recessions are the federal reserve, the federal government, and corporations.
The economic cycle follows four distinct stages: Expansion, Peak, Contraction, and Trough. A contraction also referred to as a recession is a general decline in economic activity, usually identified by a fall in the gross domestic product. No one was surprised by this recession, it’s the next stage in the economic cycle. The average economic expansion last 4.5 years and the U.S. economy has been expanding since 2009. Commonly referred to as a bull market when stock prices rise by 20%, usually after a drop of 20% and before a second 20% market decline.
Many Americans have forgotten the devastation of the 2008 recession. It started with the collapse of the housing market, unemployment spiked, and stocks fell into a bear market. A bear market describes a condition when securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. The Standard & Poor’s 500 Index lost approximately 50% of its value but only lasted from 2007-2009 due to extraordinary interventions by the federal reserve and the federal government.
THE EMERGENCY ECONOMIC STABILIZATION ACT OF 2008
The Emergency Economic Stabilization Act created the Troubled Asset Relief Program known as (TARP); $700 billion dollars was authorized under this program. 1 The U.S. Treasury only disbursed $441.8 billion because President Obama limited the companies who could participate in the government bailout. 2 By 2018, $442.7 billion had been paid back into the fund, making the government $900 million dollars of profit. The (TARP) program returned a total of $30.7 billion to the federal government.2 The Treasury negotiate a government equity stake in companies that received bailout assistance. Investing billions of dollars in depressed assets at the bottom of the economic cycle will drastically increase wealth as markets appreciate in value. Ingenious!
FINANCIAL IMPACT ON AFRICAN AMERICANS
A decade later, many African Americans still have not fully recovered and remain in a vulnerable financial position.
According to the U.S. Bureau of Labor Statistics, the unemployment rate peaked at 10 percent in 2009 for all Americans. African-Americans exceeded 16% compared to just under 9% for whites. African-American family income also suffered more than whites. The average household earned $50,654 in 2010, which was 61 percent of a white family.
African American incomes have somewhat recovered. However, African-Americans are still making only 63% of what whites earn. More importantly, networth and homeownership has not recovered. It has regressed since the recession ended, making blacks even more vulnerable to another economic downturn. This can be better understood by looking at the sharp difference in the rate of homeownership – one of the key pathways to long-term financial stability. Homeownership for African-Americans is just 42 percent – down from a high of 48 percent in 2004 – compared to 73 percent for whites.3
The federal government has actually forced us into a recession. To slow this pandemic, the government is ordering Americans to stop supplying labor for the production of goods and services. People are being told to stop going to stores, restaurants, and the work place. Our country is in dire straits. Help is on the way! Another government bailout.
1. The Federal Reserve dropped interest rates to zero and agreed to buy at least $500 billion in government Treasuries and $200 billion in government and mortgage-related bonds to protect the economy.
2. The senate approved and President Trump signed into law an $8 billion emergency spending package to combat the growing coronavirus cases.
3. A $6 Trillion fiscal stimulus package is on the way, 4 Trillion represents Federal Reserve lending power and 2 Trillion was passed in the senate. This
proposal will inject trillions of dollars into the economy to help workers, families, small business and large corporations.
This package will provide direct payments to most Americans, expand unemployment benefits and provide a $367 Billion program for small businesses.
It’s time for African Americans to stop watching and waiting and get in the financial game. We must realize each recession puts us further behind financially, while others profit. For example, the federal reserve profits by buying up corporate debt or equity before infusing dollars into a struggling economy. Corporate owners’ profit by using the cash injection to buy back low-priced stock and profiting as the economy recovers and using bailout money to pay dividends to corporate shareholders. Small businesses profit from government loans as well as receiving money consumers spend from their stimulus checks. Who is really benefiting from a financial crisis?
If you want to build personal wealth, let’s stop just consuming and follow our governments lead and own undervalued assets. Now is the time!
If you have questions or want to learn more, please give us a call, at 614-468-1660 for a complimentary consultation.
1. U.S. Department of the Treasury. “TARP Tracker from November 2008 to January 2020,” Accessed Feb. 27, 2020.
2. Brookings Institute. “An Address on Jobs and the Economy by President Barack Obama,” Accessed Dec. 3, 2019.
3. U.S. Department of Housing and Urban Development. “U.S. Housing Market Conditions.”
Darren, a Columbus, Ohio native has earned degrees in Business, Accounting, and an MBA. He has over twenty-five (25) years’ experience in financial services. The Ohio Company, First Union Securities, and Merrill Lynch were instrumental in his career prior to starting his own Wealth Management Firm, Wealth Conscious LLC, (614) 468-1660, www.wealth-conscious.com. He holds his Series 65 and Life and Health licenses. Investment advisory services are offered through Foundations Advisors, LLC an SEC Investment Advisor Representative.