Friday, September 19, 2008
Quick Thoughts on the Financial Crisis
Litttle known fact...the Roving Theologian has a MBA and experience in the financial markets before he ever became a theologian. Needless to say as the events of the past week unraveled I could not but help but put back on my finance hat again. And my verdict?
No one is clean. Well practically no one. Whether you like John McCain or not, he was out front several years ago pointing to the major crisis that was coming. But the problem is McCain is a little like the guy who complain about everything. Even when he is right you think it is merely becaue he is against everything and eventually everything has bad periods. Interestingly enough, McCain reminds me most of the man I voted for in 2000 - Ralph Nade, who also has been complaining for years about the flowing of dollars from big companies to congressmen of both parties. Yes, after a while it becomes just his default position, but that does not change the fact that much of what he says is true.
On the crisis this week we have to point out the fact that much of the problem is not due to under-regulation per se. The problemwas that too often it was the wrong regulations. Allowing banks to compete in mutliple areas (the result of the 1999 de-regualtion act) merely put US Banks on equal footing with many of their world-wide competitors. But the problem was that cheap money from the Fed encouraged taking bets on financial vehicles that were not easily valued or traded - Mortgage Backed Serucirites. For a good summary on this (admitedly from a conservative viewpoint), read this:
Look, when ever there are unknowns in evaluating risk, what is called the risk premium rises. This was covered over for the past by the increase in the value of real estate, which simply could not continue. If we had India’s growing population with the percentage growth of the Chinese economy (which is easier to do when you start with a much smaller number), then maybe you can have a fairly straight line up in the value of property, but even there a limit is going to be reached.
As the markets began to falter - in part because everyone who could afford a home probably had and also because of over-building we were setting ourselves up for a real estate recession. Note however that some markets are still doign well and on the positive side, the decrease in values has again made entry into the housing market by first time home owners possible.
On a personal side, people fret about losing 30% of their home’s value, but the thing is, that value was air to begin with and if you counted on it to be permanent you were not thinking rationally. Its like when Amazon’s stock fell tremendously after the tech boom bubble burst and people said they lost 300%. Well, only if they bought at the top. If you bought it, held it to the top and then fell back down you only failed to realize what was an unreal gain.
Anyways, for a lot of reasons, political, economic, and otherwise everyone in Washington had the desire to make credit more and more available to more and more people with less and less ability to pay. Practically everyone is to blame in this venture. And now we are facing taking on between $500 and $750 Billion in new debt to pay for the basket of bad debt.
Now, the key will be to get real numbers on these securities. If we can do that, eliminate the unknown, get as many of these to perform as is possible or move the assets into re-sale, then that price will go down.
But at least today, with Barney Frank, John McCain, and a number of others pulling toghether to use etiher political strength or market knowledge to create this new institution. What will be the rules? What will each “side” give-up? I don’t know. But if we play poltiics with this venture, a venture that has clearly done what was needed - reassuring international markets and returning liquidity - then perhaps both Congres, the Presidency and the Federal Reserve are not going to serve us in the future.
Which should scare us. But at least for the time being...we seem to have found a painful but good way out.