Saturday, September 20, 2008

Bailouts, Bankruptcies and Bloated Blather

Well, it's been quite a week in the money world. Bailouts, bankruptcies and bloated blather dominated the news. The talking heads on cable went wild on the subject, while each of the presidential candidates were especially inane in their varying pronouncements during the week.

Even though the seeds of today's crisis may have been sown well before they took over the reigns of government, who would have thought that a Republican administration would turn our financial system into one that emulates France? The details are still being worked out, but the rough estimate is that the overall government commitment to staunch the bleeding for awhile is approximately $1 Trillion (yup, that's Trillion with a capital T). And I say for "awhile" because no one really knows the full extent of the cost that will ultimately be incurred. History suggests that the amount the government will commit will probably rise substantially.

The basic cause of the financial meltdown that almost occurred this week was a lack of trust. Namely, trust that if I did a transaction with you, you would be around to honor your part of the bargain. In this environment, sane people (and organizations) simply stop doing business with the untrusted party. If nobody trusts anyone, all transactions cease. In the financial world, that's called Armageddon.

The lack of trust all fundamentally stems from the home mortgage debacle, in which scads of money was loaned to people who, put simply and crudely, just couldn't pay it back. Whether it's the creative capitalists on Wall Street who packaged the mortgages into ever more arcane securities sold around the world to organizations stretching for higher yields; or the unscrupulous mortgage banks and brokers who pushed money on hapless people who suddenly and unquestioning were able to live in homes valued at more than their wildest dreams; or the crazy accountants who demanded that the banks holding the mortgage-backed securities value them at unreasonably low prices; or the credit rating agencies who suddenly woke up to discover that their AAA ratings were just a tad overblown; or the government regulators who had no clue what to regulate; or lobbyists who somehow forced the government to bend over in an unseemly manner; or any other organization I've neglected to mention who had the slightest participation in creating the real estate bubble, the problem is real and darn serious.

So, at this point, it seems to me that Treasury Secretary Paulson and Fed Chairman Bernake, flying blind and having properly scared the pants off of the President and the leaders of Congress, are proposing some sensible actions selected from a steaming pile of rather unsavory options. Where and how it will end, no one knows. In this environment, the conventional wisdom still applies: just stay diversified. It's likely, given the strength of the US economy, that this will work out the best through the various ups and downs that are sure to follow.

By the way, it's really interesting that, even in today's highly sophisticated society, most financial transactions still take place based on just trusting the other person's voice (or mouse click) in the transaction. That's the way business has been done since money was invented (except for the mouse click part).


Rami said...

Interesting comments about the market. They go along with what I have been saying now for 3 years and I am not an economist -- just common sense person out of the crowd.

Anonymous said...

A blog we can finally agree on. NMI