Monday, October 13, 2008


The world has taken an economic hit. The hit is nothing compared to WWII. It is nothing compared to the Great Depression. It is no fun but it is not the end of times. Armageddon it is not. The worlds assets have been written down by somewhere in the neighborhood of 15 Trillion Dollars. A lot of money indeed, but still only a small fraction of total assets.

World wide, times were too good for too long. During these good times, the policies of government were designed to inflate the number one asset held by most people. In America, the percentage of homeowners averaged 64% for 40 years. In the late 1990's, US leaders decided to dramatically lower traditional home buying standards. It was a grand experiment that did some good. A large number of families who purchased homes under these programs continue to own those homes today. We reached the level of 69% home ownership before we began the retreat. The cost of government social engineering, combined with greed has resulted in a major correction. That is all! A huge correction, on the order of recession, not on the order of depression or World War. Something to be lived through.

Our top leadership has made a lot of noise while giving our economy ineffective doses of Castor Oil. Democrats and republicans have joined in votes to give $600 to each person in the country and to one day "invest $700 Billion" to "bail out" the banks. The patient feels no better because the medicine offered was designed to give the "doctors" cover for having done something, not to effect a cure. The actual system used to cure "credit drunkenness" has been to allow the biggest binge possible and then to make a lot of noise while millions of people suffer through their hangovers. The pain has been felt by the drunk and by their neighbors, but the neighbors must not be sanctimonious because almost all got at least a little bit drunk along the way. There has been a tremendous amount of talk about all the little band aids being applied but no real influx of core capital has taken place.

It has been weeks since our Treasury Secretary proposed legislation under which the government would "bail out" the banking system. We have been through the long public "trial", but none of this money has been spent. Back when Wachovia was being plundered, the government, without a special vote from congress, was able to grant Citibank 12 Billion Dollars at the stroke of a pen. Now, day after day, banks hoard money in anticipation of the day when the government will establish a new price for securities held by the banks. The "bail out" has been turned into a "Sword of Damocles"; as always, the waiting around in the hospital is as bad as the illness.

Had Paulson wanted this problem solved in a hurry, he could have used existing tools months ago. To make the influx of capital "make sense" to those out to get the "greedy bankers", it could have been done like the Citibank deal, where the government picked up 10% of the bank at a diluted price, in exchange for the accounting entry needed to re-capitalize the bank. As an alternative, all banks could have been given an equal dose of help by temporarily lowering capital requirements.

While living though the real estate recessions of 1973-74 and 1990-91, it became obvious that much of the pain and suffering could have been avoided. In each of these prior recessions, the powers in control of the purse, on the democrat and republican sides of the isle made matters worse than they had to be. Yes, I have seen this movie before. I know how it turns out. After months of being "frozen up", a number of ocean front condos recently sold. The owners finally gave up. They were holding on for dear life, before the public bail out circus came to town. Most of these sellers have lost all or most of their entire investment in the condos. These big chunks of assets are changing hands at prices not seen since a similar game was played in 1991. Like Mr. Buffet has said, the markets are controlled by fear and greed. What Mr. Buffet has not mentioned is that fear is a tool often used by the greedy.

Over the past few years, trillions of dollars of assets changed hands at high prices. Those in control of governments have worked together to bring the value of trillions of dollars of assets down dramatically and once again trillions of dollars worth are changing hands. There are two reasons why It is difficult to be among those buying while the prices are down. One must have money and one must have attitude. Of the two, attitude is the key factor. Money can be found.

Those who buy while prices are low will be well rewarded. This situation is not Armageddon, it is a man made game being played. Yes, people are hurting. But, it is still a game being played by the powerful. Those in power see their actions in a different light. They are "saving the world from itself". Only a very few at the very top knew how much control they had. When this started, the rating agencies and everyone else believed that sub prime securities had been sufficiently isolated. A relatively small problem has been turned into a financial crisis.

One of the many ironies is that the transfer of wealth to the most powerful has been enabled by those who have cried about the distribution of wealth. An a relative basis, the poor did extremely well during the past 15 years. Today, the poor are getting hit the hardest. The healing has already begun, the government will pass a number of more bills to aid the poor. There will be more stimulus plans, more unemployment insurance and $1,000 checks will replace the $600 checks. While these side shows are played out, the center circus ring will move along. No, not Armageddon, not even a great circus.