I started this thread 24 hours ago and it has generated a great deal of chatter.
Somewhere along the line in the last 50 years, the lessons of the Great Depression were lost. Back in the 1940s and 1950s, the rule of thumb for households was to save 20% of your take-home income. Then the baby boomers came along and this rule of thumb turned into 90/10 by the 1980s. By the mid 1990s, it was 100/0 – people were spending everything they earned, with no buffer or wiggle room. In the last several years, we have literally turned into a debtor nation, as we are now spending MORE than we earn, even though dual-income households are now the norm. We have been conditioned to think that spending is good and spending more is better. If Jones across the street has a new 55 inch plasma TV, then by God we should have one too. Nothing could be further from the truth.
I heard a radio commercial today that made me stop and think. The “You Deserve A House Blowout Sale” was made by a residential developer and was targeted at lower income people. No one deserves a house, or a car, or anything else. The only things we are entitled to are life, liberty, and the pursuit of happiness. Everything else is optional, and must be earned. Why has our country promoted spending more than we earn? It has taken almost two decades for the consequence of this strategy to rear its ugly head. But brother, the consequences are staring us square in the face. Are people really that stupid to buy into what marketers have been saying, against all good common sense? Maybe they are. Maybe I overestimate the sensibilities of the American consumer.
I remain a big believer in capitalism. The current problems are not caused by capitalism; that system was and is working just fine. The problems are caused by people who don’t do simple math. People simply aren’t thinking. By this, I mean the consumers who bite off more than they can chew. I mean the Wall Street packagers who don’t carefully evaluate (or even look at) each individual mortgage. I mean the creators of derivatives who don’t run worst case scenarios for their products. I mean the corporate buyers of those derivative products who don’t ask any questions about them. No one has been doing any simple math; they just assume that things will probably work out OK. Problems can be addressed later. Well, it’s later.
Some people have said that no bailout should happen, that we should let the whole thing crash down and pick up the pieces later. That’s OK, as long as you realize that the little guy, the consumer, will be hurt far worse than with a bailout. Massive unemployment, exceeding Depression levels, would be the norm. IRAs wiped out, 401ks down 70-80% in some cases. The FDIC would likely fail and there would be a race to pull out deposits, causing most of the rest of the banks to fail. The counterparty risk I mentioned yesterday is at the heart of this matter, not bad mortgages. Letting the collapse happen would put the Dow in the 3000-5000 range. A bailout may keep it at 8000 or above.
Let me be very clear on one final point. I do not like the idea of the government interfering in business, not mine or anyone else’s. I hate socialism and communism with a passion. I interact with the government four times a year: In April when I pay taxes, in July when I renew my car tags, in September when I pay my property taxes, and in November when I vote. That’s it. Government is usually the worst answer to any problem. My heart tells me to let the house of cards collapse and throw us into another depression. That would cure this country of many bad habits for at least another 100 years. But my head tells me that it doesn’t have to be that way for the little guy. I said that the blame lies with consumers first, who willingly and knowingly took on more debt than they could handle, and with Wall Street second, which failed to research its own investment products. This bailout would make both parties better off than with no bailout. Even though I’ve worked for several Wall Street firms, I would be in favor of letting all of them fail (because they failed Risk Management 101)– but only AFTER the consumer is saved. Though some of you don’t get it, you don’t help the consumer without helping financial firms first. All rational thought was suspended for years, and we are only now starting to regain our senses. I say let the government should do the $700 billion bailout, and then get the hell out of the way. The bailout should stop the dominos from falling. But if it doesn’t, then nature should take its course.
To answer a few questions:
I believe the market will go down from here no matter what happens, because many of the big firms, and many individuals, need to deleverage very badly. They must pay off great amounts of debt, and quickly. If they can’t, they will fail. If they can, their earnings potential will be greatly weakened for several years. Either way, GDP will suffer as everyone begins the great unwind. The bailout is a bandaid, it will only slow the bleeding, not stop it.
Has fraud taken place? I don’t know, perhaps in the mortgage industry. Possibly at Bear Stearns. I doubt it has taken place on a widespread level, though. Stupidity on many levels has taken place, however.
Will taxpayers actually be out $700 billion if the bill passes? They will be out of it initially, but should recoup some of that money over the next few years as the Fed sells the assets. How much? I would be surprised if the taxpayers haven’t got back half of it in five years. Still, $350 billion is an awful lot of money.
Is the government too big? Yes, by a long ways. Having suffered through a few years of working in a bureaucracy, I believe that you can cut at least half of the people and programs without hurting anything, as long as they are the right people and programs to cut. Some people believe that the government exists to employ their sorry asses; the “employer of last resort” when no one else will take them.
Where is my money right now? Part cash, part short financial stocks and other sensitive sectors.
Sorry for the long post.