ooops! It just went off - I swear I didn't know it was loaded...maybe this one will be more readable....Anatomy of a Disaster - Part 1by Andy Sutton October 3, 2008http://www.financialsense.com/fsu/editorials/sutton/2008/100...For a minute, let’s forget about all that has happened in the past year. Forget about the signing of the bailout into law. Let’s forget about the failure of some of America’s most iconic Wall Street firms. Let’s forget about the insolvency of Fannie, Freddie, and FDIC (yes, they’re broke too). Let’s forget about Northern Rock, Countrywide, and AIG. They are all but casualties and symptoms. They are not the problem. Adjustable rate mortgages were not the problem, nor were 0% interest credit cards. No, there was one single source of all that ails not only the US economy, but the world, and that problem is greed. That greed has spread from sea to shining sea over the past thirty seven years as America decoupled totally from its monetary and spendthrift roots.The amazing thing about the free markets though is that they are self-cleansing. Get too far out of line and the market zaps you. You’re punished and you learn your lesson and get back in line. Unfortunately, for much of recent history, we have sought as a society to mitigate or even eliminate the consequences of one’s actions. This is not purely a monetary phenomenon, but one that permeates every corner of our society. I’m sure you can all think of a myriad of examples of this mindset at work.It was this very mindset that prompted me to warn readers about the coming barrage of bailouts in March of 2007: “After the stock market collapse of 2000-2002, the economy faced a stiff headwind and the Federal Reserve reacted by creating the most credit-friendly monetary policy in American history with low interest rates and liquidity abound. However, the tragic flaw of easy money is that it leads to speculation, and ultimately, malinvestment. Low interest rates caused speculation in the residential real-estate market to a level that has been unprecedented. Double-digit home appreciation led lenders to make more and more risky loans based on the faulty assumption.............. The fact that there will be a bailout is a foregone conclusion. We should be more interested in the timing and ultimately the cost of any such bailout and who is going to bear the cost. It is my guess that most of the people reading this column will not like the answer to the last question.”Given all that has transpired over the past two decades, the fact that there would be a bailout could be mailed in. It was a slam dunk........... There are certain irrefutable rules of economics, of markets, and of nature. While they can be altered for short periods of time, in the long run, they always reassert themselves. One would think that we’d have learned this lesson from the 1930’s and 1970's. Apparently, we have not. Because of this failure to grasp these simple realities, we are destined to relive what otherwise would have been memory lane.The Great Depression – A market crash or something else?Despite the position of the history books that the stock market collapse of 1929 caused the Great Depression, it must be noted that the US Economy had already dipped into a serious recession as early as August 1929. But what was at the root of that recession? It certainly wasn't the stock market crash. While the seeds of the 1929 recession were germinating, the stock market was headed for Mars, riding a bolt of lightning. Between May 1928 and September 1929, stock prices increased around 40%. This happened despite the Federal Reserve banning bank borrowing for margin purchases on February 2nd of 1929 in order to curb speculation. What a novel idea.Despite the rapid climb in the stock market, by the middle of 1929, business inventories had grown to three times the prior year's levels. Production would quickly decline at an annualized rate of 20%, wholesale prices by 7.5%, and per capita income by 5%. While worker productivity had grown by an amazing 43% from 1921 to 1929, the wealth for the most part had been consolidated in the top 1% with the per capita income actually dropping 4% during the course of the decade.The seeds of the 1929 recession had been sown by a decade of decadence. Unfortunately, the bulk of Americans were left out of that prosperity. Here are some 1920’s trivia that should help connect the dots and make some parallels. * The number of people reporting a $500,000 income grew from 156 in 1920 to 1,446 in 1929 – a greater increase than any other decade, but still represented less than 1% of the wage earners. * The top 1% owned 40% of the nation's wealth by the end of the decade. * During the course of the decade, over 1,200 corporate mergers would gobble up more than 6,000 independent companies. By the end of the 1920's, 200 corporations would control approximately one half of American industry. * In 1929, more than half of all Americans were living on below a minimum subsistence level. Per capita income was $750 per year.New century – same problem?Now let's take a look at the situation we have before us in 2008. When looking at statistics, it is very difficult to draw parallels between the actual numbers of that time and the numbers of today. Decades of manipulations (some justified, some not) have made it nearly impossible to do side-by-side comparisons........much more - http://www.financialsense.com/fsu/editorials/sutton/2008/100...
“After the stock market collapse of 2000-2002, the economy faced a stiff headwind and the Federal Reserve reacted by creating the most credit-friendly monetary policy in American history with low interest rates and liquidity abound. However, the tragic flaw of easy money is that it leads to speculation, and ultimately, malinvestment. Low interest rates caused speculation in the residential real-estate market to a level that has been unprecedented. Double-digit home appreciation led lenders to make more and more risky loans based on the faulty assumption.............. The fact that there will be a bailout is a foregone conclusion. We should be more interested in the timing and ultimately the cost of any such bailout and who is going to bear the cost. It is my guess that most of the people reading this column will not like the answer to the last question.”
The American people are going to have to come to grips with the larger picture. Not about a deep recession or depression, but about free markets versus government.What happened is not a failure of the free markets. This is, quite simply, what free markets do. You have big highs and deep lows. We've had many depressions in our country's history; the Great Depression was simply the greatest of the depressions, the others called "panics."Many are blaming this on Wall Street suddenly becoming "greedy." Nope. Wall Street is always fully greedy. Same with the oil companies. We have to ask what is different now from the past.Some are blaming Congress for making Fannie and Freddie take bad mortgages. Yes, that happened, but all of this would have been happening regardless. We've had two back-to-back bubbles, both allowed to occur by presidents and congresses of both parties, and encouraged all the way by Alan Greenspan.We had the Fed trying to avoid recessions, while doing nothing to avoid bubbles. The one-sidedness of that created the "Greenspan put." Even now, the government wants to prevent downside while doing nothing to stop the upside.There appear to be some advantages to truly free markets. I believe we had higher annual growth before the Great Depression (about 5%), and it's dropped to about 3% under higher government spending and regulation. I guess the question is whether we want to live in a free system of extreme booms and busts, or a system of regulation with smaller booms and busts.A lot of the talk going around is about the "deregulation" of the 1980s, and allowing various types of financial institutions to merge. As I see it, that has nothing to do with this crisis. Regulation shouldn't straitjacket us to the world of the 1930s or the world of 2008, it should prevent bubbles and prevent any company, sector, or anything from being "too big to fail" while taking on extreme risk.Do we need to prevent any financial institution from issuing a mortgage with less than x% downpayment? I wouldn't think so, as long as the government would see a RE bubble forming and jack up interest rates to kill it. But does anybody think that'll ever happen? I hope that whatever regulation is put in place, in the financial sector, the Fed, SEC and Treasury, will focus on preventing bubbles. Somehow, though, I doubt it will.
The amazing thing about the free markets though is that they are self-cleansing.Except the banking system. Once all the banks have gone, nothing can be cleansed or anything slse, there's no free market left.
It's different this time.
Hi Slap,I guess the question is whether we want to live in a free system of extreme booms and busts, or a system of regulation with smaller booms and busts.Therein lies the fallacy... The reality is that regulation SOMETIMES reduces a cyclic extreme, and SOMETIMES excacerbates a cyclic extreme. There's no way of telling for sure,in advance, which it will be (such is always the nature of unintended consequences.)The systemic troubles we are having right now are CLEARLY significantly a result of the government intervention in artificially depressed interest rates (via the Fed) for an over-extended period of time, along with artificially extended risk-taking (via federally-encouraged Fannie & Freddie voraciousness, and HUD/FHA under-insuredness) for an over-extended period of time.While so many are crying for MORE regulation, they're blind to the reality that the CURRENT ills are from an OVER-EXUBERENCE of ineffective regulation and government intervention.As long as we are as blind to the effects caused by our government intervention, we can never hope to begin to become accurate in the proper balancing of beneficial intervention.We're simply doomed to dramatic swings... whether we mess with nature, or not.Cheers,Dave
What happened is not a failure of the free markets. This is, quite simply, what free markets do.But not nearly as much as people think.You have big highs and deep lows. We've had many depressions in our country's history; the Great Depression was simply the greatest of the depressions, the others called "panics."The Great Depression had very little to do with a free market. It started with a government-caused and government-aggravated collapse of a government-caused and government-encouraged asset bubble. This was followed by a decade of the government actively stifling the economy for the sake of government-run "rescue" programs.
Greed is the problem, but there is no way to do away with greed.Corps who issued credit swaps without the capital to cover them were just evading insurance laws, and they should not have been allowed to get away with it.
Greed is the problem, but there is no way to do away with greed.Exactly. Its human nature.Believe me, society has been in this boat many times before, and they will be again many time hereafter.Probably not in our lifetimes, and with some luck not in the lifetimes of our kids either. But after that? you bet!No legislation, no rules, no laws, no education and no luck can stop it. Its going to happen again.
... Its human nature.________________________________________________________________________The key here is that shareholders are us!Today we live in a corporatist world, strongly supported by us shareholders! Oh sure, many of us shareholders still believe in democracy - economic and political, and all that jaz, ... but we shareholders long ago sold out to big business - by buying it's shares, ... and eversince then, together with corporate executives, we continually demand more and more returns on our investment. And that is why, ... pretty well eversince forever (... until now, of course!), we shareholders - in chorus with CEOs, constantly been telling government to butt out, ...I inserted "... until now, of course!", above, ... because the current situation is different - it includes an economic meltdown on major stock markets, ... and our own money is on the line. And so, ... cold hard cash from any government is no longer communism to us shareholders!And so, thank you the Democrats in Congress, and to you Mr. Barack Obama! Yes, we shareholders all know that you made this bail-out scam your very own, (...how clever!), ... but we also recognise that this plan's origin is the Bush White House kitchen, ... so our thanks go there, too! Plutocratic Bush-Obama scam will serve us shareholders well, ... at least for a little while!C, ... this Extortion Bill rocks!
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |
BATS data provided in real-time. NYSE, NASDAQ and NYSEMKT data delayed 15 minutes.
Real-Time prices provided by BATS. Market data provided by Interactive Data.
Company fundamental data provided by Morningstar. Earnings Estimates, Analyst Rat