By: Douglas J Utberg

John Kennedy described a crisis as the simultaneous existence of danger and opportunity.  This understanding provides a very accurate description of the current financial crisis that is causing turmoil in the markets . . . it is an opportunity that is riding on the dangerous wind.  To those who are prepared, the opportunity can be very great and to those who are unprepared, the danger can be immense.

We have already seen the danger from the recent financial collapse, and are just beginning to see the opportunities.  One opportunity that we are seeing now is a ‘flight to quality’ that has resulted in treasury bills with yields very near zero, creating extremely low fixed-rate mortgages for those who can qualify.

Another opportunity on the rise is income real estate.  Since the credit collapse has pushed down prices, there are many properties available to an investor that is willing to take action.  When this is combined with the relatively constrictive credit standards most banks are now adhering to, and the high likelihood that interest rates will increase in the future, it is very likely that rents will be increasing.

There are definitely dangerous seas to weather though.  One such danger is the looming specter of inflation.  While it is true that the credit contraction has cause prices in many sectors of the economy to contract, it is also true that the Federal Reserve has significantly increased the supply of ‘high powered money’ in the economy.  Once credit markets normalize, that extra money floating around in the economy will result in dramatic price increases.  (Flat Output + Growth in Money Supply = Inflation)

One possible remedy to this inflation is for the government to pull the excess money out of circulation.  Unfortunately, this would create a rapid increase in interest rates that would have a high likelihood of collapsing the economy back into recession.