3-15-10

One Year Later...Where We Stand...Where We're Going

About this time last year most people were in one of two camps. Half were scared the financial system was going to collapse. The other half believed that it already had collapsed. It wasn't pretty. Big names Wachovia, Fannie Mae, Washington Mutual, GM and many more were biting the dust. Bigger names had already failed, notably Lehman Brothers and Bear Stearns.

I remember selling put options on Morgan Stanley, trying to buy the shares for $2.50 they were just above $5 at the time. Goldman was trading in the $50s. For an investor with nerves of steel, it was time for a feeding frenzy. There was money to be made, lots of it.

But, by the same token money was being lost hand over fist by scared sellers who thought the end was near. The VIX or Volatility indicator, a measure of fear, was trading near all time highs, almost twice the level of the crash of 1987 and the days after 9/11. IRA's, 401ks and all manner of savings and retirement plans were decimated. It will happen again.

Lies, Damned Lies

A year later not much has changed from a fundamental standpoint. Instead of fixing the problems that led to the crash, the government has decided to exacerbate them. Sure, it may seem that we are victorious for now, but it will be short-lived as the policies put into place are nothing more than a band-aid...and my friends time is running short.

Reform the financial system - the first lie. Banks need to de-leverage. Ok, that's well and good in theory, but in practice all that has happened is that instead of 40 to 1 leverage being acceptable risk, now 20 to 1 is ok. This means that banks can still gamble $20 for each $1 in deposits.

Regulate Derivatives - one of the principal causes of the crisis was the use of derivatives to make and insure bets on and against investments. If you thought a company was going to fail, you bough insurance on its bonds. If you were a company like Goldman, you sold the insurance on the bonds and then proceeded to make money by also shorting the same investments because you saw the sellers lining up. As for regulating these weapons of financial mass destruction - nothing done.

Let Them Fail - well, GM is still around, AIG is still breathing and so are Fannie and Freddie. The money keeps pouring in to government coffers from you and me, and then right out the door as handouts to subsidize losses from these companies. In the case of AIG, our money went to bail out investors who put money in risk instruments offered by AIG.

The list goes on. What we have done dear reader, is mess with the natural law of business...

Instead of letting the deadweight sink, we threw ballast under it. Instead of allowing the weak to perish, we put them on IVs and forced them to live another day just to further increase the risk to the system. One might argue that if the government had done nothing, we would be facing 25% unemployment and another Great Depression. I say, "so be it"!

Rewarding excessive risk with more money is not the solution. In fact, it's creating an even bigger problem.

Before the crash only 15% or so of the population thought it was OK to walk away from a debt like a mortgage that was upside down. That number is now more than double. What we have done is tell people to go ahead and gamble because we are a weak country with a weak government that would rather bail out the losers than bet on the winners.

Since the Great Depression, America has become the Wealthiest country on the planet - the wealthiest the world has ever seen. In the years between 1929 and 2000 the number of billionaires and millionaires created has grown exponentially. There were few bailouts, maybe one or two like Chrysler or Long Term Capital. But we're talking a couple of billion dollars in total.

Yet, even after the greatest disaster the financial markets has ever seen, even after a massive world war, a dozen recessions, the collapse of one bubble after another, the savings and loans crisis, and more, the country survived and prospered. There was no government guarantee of risk. You played the game and the losers went bust or went home. That is how the winners emerge and get stronger. It's economic Darwinism.

Now the exact opposite is in place. Don't let the weak die off. Instead give them more money to piss away so we can keep our lavish political lifestyle intact. There is no better case for term limits than what we are seeing right now. Our government is impotent and weak - no need to make fun of the Europeans anymore. We have become the French!

Not anymore. Now everyone wants a bailout and if you stand up against it, you're called a heretic or worse...a realist. Last week Congress was miffed because Jim Bunning stood in the way of extending unemployment benefits. What use to be 12 weeks of unemployment benefits is now all the way to 99 weeks. Does it really take two years to find work that will put enough food on the table? I know it's tough out there but come on!

Last week Florida announced that 2.56 million people were on food stamps, one out of every eight people who live in the state. One recipient remarked that she was getting $200 per month, and close to $700 for a family of four to buy food...but it was still tough to eat - what in the hell are you buying? Caviar?! Our own Nancy Patterson, who writes Easy Street every Wednesday, could probably teach her how to buy 4 months of food with that money.

Fast Forward

Where do we go from here? Should we lose all hope? No. It takes moments like this to wake people up. At a conference last week I spoke to some attendees. The conference was about estate planning. They were not happy. Most were in their 50s, 60s and 70s. This was not the America they grew up in and they are getting mad. Talk of peaceful anarchism wafted through the room. These were business people, lawyers, doctors, and dentists, not your usual card carrying NRA crowd. Yet even they've had enough. No one is working for the people, not the Republicans or the Democrats. They are working for themselves, to line their Charlie Rangel size pockets.

It boils down to this my friends. It's time to move on Washington with your vote. Instead of voting down party lines, it's time to vote for candidates who will do the right thing. Ron Paul, for example is not a well-liked figure inside the beltway. Yet he is on the right track with his criticism of government excess. This is not an endorsement for him by any measure, but a wake up to call to begin researching potential candidates for the next presidential term. It's not too early...and hopefully it's not too late. You can choose to stare into the abyss and do nothing...or help build a bridge to cross it.

Best Regards,

Mark Patricks
 

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