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Following up on yesterday

Richard Charpentier Notes from Rich Leave a Comment

After my post yesterday I received multiple private e-mails.  Way too funny if you ask me.

One e-mail peaked my interest.  My good friend Tom sent along an e-mail with a link to one of Bill Fleckenstein’s recent articles.  I haven’t read the latest articles, so this one gave me a giggle and is worth a read!  The title is “Cry Baby Capitalists Whine for More.”  Very appropriate title.

Actually, a giggle isn’t the right term.  It made me know I wasn’t alone as I watch this economy move to the brink of a serious implosion.  I guess I’m just glad I’m not the only one with a certain view point.  Always nice to know you’re not alone!  🙂

The bottom line in my mind is that we haven’t been a free market society in quite a while.  We’re in some form of managed capitalism.  The management goes something like this…..

When we’re on an upswing we’re all capitalists.  Don’t tax my ridiculous profits on Pets Dot Com.  Stay out of my business.

When we’re on the downswing we become socialists quickly.  The government needs to bail out banks, bail us out of our bad decisions, and behave like a nanny state.

Think that one is about right.  The 90’s saw more deregulation in banking to make lending easier.  Now we’re clamoring for regulation and government takeover of financial institutions.  Pretty quick turn about, don’t you think?

Speaking of takeovers and more oversight, I read the following article yesterday with great interest.   The author Steven Pearlstein writes for the Washington Post, and had an interesting deliniation of the Freddie / Fannie crisis.  I found his article informative, but his conclusion blew my mind.  The closing paragraph said the following:

But the lesson from the recent debacle is that if we are going to rely on government to bail out private entities, then government ought to have a much stronger hand in making sure a rescue is never needed.

What an interesting conclusion.  And it’s one that I totally don’t agree with.  See, Fannie and Freddie were government sponsored entities.  The ties were too obvious, and they were always referred to as GSE’s.  They were often times the lender of last resort, and seemed to me to act directly on the behest of the Federal Reserve and the Treasury.  With friends like that, and oversight, they still created a nightmare scenario.

So, with beauracracies looking right over their shoulders they made this disaster.  That implies they should have had more government control?  Washington used these enterprises to foster inflation, create loose credit, and ensure that really bad paper had a home and a backer.  Gee, wonder what would have happened if the government got involved any more?

Saying Fannie & Freddie needed more ties to Washington is like saying there aren’t enough government employees at the DMV…..

Shifting gears a bit

So, where are we now economically?  Personally I think we’re in opposite land.  Why do I say that?  Simple, people who have prudently invested are being punished, and people who did lots of wrong things are getting bailed out.  Here’s my short list.

  • With housing prices now sinking, folks who could afford the mortgages they got are now being punished.  $600K for the home loan, and now the house is worth $480K.  Over paid for a home, have to service the debt and can.  All thanks to inflationary policy.  Had more sane lending policies prevailed the housing bubble wouldn’t have been as large.  Losses would have been curbed.
  • Folks who couldn’t afford their mortgages and used instruments like ARMs (adjustable rate mortgages) now have the attention of the government.  They need a bailout.  It wasn’t their fault they never thought rates could go up.  They were forced to sign the mortgage, forced to over buy, etc.
  • Folks investing in “safe havens” are really paying the price.  We clearly believe we can still inflate our way out of this problem, and we’ll manipulate the safe havens just to be sure.
  • The standard “saver” who puts their money in CD’s, money markets, etc., is losing his shirt.  Rates are held lower than inflation, so saving that way is a guaranteed loss.  Where should that person put their money?
  • Market clearing is not working.  Bad investments are not failing, instead they’re being propped up.  Good investments are still affected by inflation.  Your best bet should have been to over buy, participate in the bubble, and wait for your bailout.

I think the average homeowner who didn’t use their house as an ATM gets hit hardest.  They over paid for their homes due to prices being bid up through loose lending.  Now these people are losing 20 – 30% of the perceived value.  A value that was only created through inflation.  Talk about robbing the middle class!  But that’s exactly what inflation does.

At a loss

Personally I have no advice on this situation.  Markets left to clear will do so on their own, and in their own time.  Markets that are being propped up are a different story, and usually propping them up leads to a larger crash in the long term.  The banking crisis is far from over.  As a matter of fact, I’d say we’re only a quarter of the way in.  Ugh!

In the meantime what I knew as safe haven investments aren’t so safe.  It’s hard to pick a good spot to be in when markets are as manipulated as the ones we see today.  It’s at the whim of regulators and Wall Street right now as to who wins and who looses.  You can’t predict much currently since you don’t know what their pet projects and interests are.

In the end, we’re all paying for this mess.  Taxes, loss of property value, loss of investment value…..Guess we’ll be seeing more government over sight soon as folks want bailouts.  I think the average investor who did the right thing deserves a bailout more than any other.  But that’s the last person who will be on the radar screen in this mess!

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