Tuesday, September 16, 2008

....to thunderous applause

In the beginning there was much liquidity. Credit was loose and easy to come by. Home buyers were able to get loans well beyond their income level’s ability to repay. No matter, housing prices were going up. You just refinance every few years until you sell.

Then the buying slowed down. Housing prices fell. Interest rates adjusted. Borrowers fell behind. Many walked away or foreclosed.

The mortgage broker made money. The firm that made the loan and resold it made money. The firm that bought that loan, packaged it with other loans and resold them, made money. At the banks that bought the packaged loans and financial instruments tied to them, executives made money. Even the ones who were fired, walked away with big paydays. Even the borrower got use of the home and/or any cash received from the loan they couldn’t repay.

So who lost? The taxpayer. Just as we were seeing the light at the end of the tunnel in government spending in Iraq, the feds stepped up and bought out Freddie, Fannie, then AIG. Now they’re enacting a plan to take the garbage off the balance sheets of the banks and dump it in the lap of the taxpayer. The nation’s financial system is being nationalized...and Wall Street cheers as perhaps the biggest ponzi scheme in the history of the world comes to a successful conclusion.

The politicians aren’t card carrying communists. They’re just in fear of their jobs, their legacy, losing the approval they so cherish.

Allowing the financial markets to reap the fruits of their misbehavior and poor judgments would have been ugly, chaotic, caused years of calamity and harship and would have been justice. Lessons would have been learned that would not soon, if ever be forgotten. We would have survived. We would have come out stronger. What have we learned now? That practicing good judgment, paying your bills on time, living within your means, generating real value for an honest profit is for chumps.

To the small business person who is making it in this environment, without a government bail out, at least you should recognize that you have outwitted and outperformed the best and brightest at Shearshon, Merrill, AIG, Freddie, Fannie and a host of other Wall Street legends. The government may not recognize your accomplishment. In fact, you’ll be paying the bill for this mess. But for what it’s worth, I salute you.

Where do we go from here? It’s hard to say. The universe rarely unfolds the way I'd like it to, but that doesn't mean you can't spot opportunities. In a few months, the government will have a bunch of real estate on its books that it's going to want to unload in a hurry. Unlike commercial ventures, they'll go as low as they need to go to get them sold. Similar to the RTC situation in 1991, there's going to be a fire sale on real estate. If you've got some cash in the closet, take advantage. Recall that in the early 90's, once the RTC unloaded its inventory, the market recovered quite rapidly. Then again, looking out twelve months is tough business these days when the rules are subject to change without notice. Who knows? They may decide to regulate home prices next near, or next week.

In any case, capitalism may be out as a national economic policy, but as a personal lifestyle choice, it's always available. Just be aware of the changing nature of the environment.

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