How ’bout some good news! Part 1

By Reuters Staff
March 14, 2008

A dear friend e-mailed me yesterday and asked that I post some good news on my blog. It can be difficult these days as the credit markets implode and the realization sinks in that the worst is far from over. House prices have farther to fall, much farther. Banks will fail. The stock market will continue to crater as investors realize second half earnings will NOT rebound.

What’s the good news? I’d say that is the good news.

Yes credit markets are imploding and banks are failing. Why’s that good news? If you’ll permit me a moment of schadenfreude, I’d say it’s good news because the people who should be suffering ARE suffering. Banks made bad lending decisions, investors abdicated their due diligence responsibilities to credit rating agencies, both are suffering mightily. The whole structured finance business, whose function was to funnel cash from investors to home borrowers, regardless of risk, is more or less dead and tens of thousands of people will lose jobs as a result.

Real estate agents who helped inflate the housing bubble themselves with mindless marketing mischief (“house prices never go down”…..”there’s never been a better time to buy”….”renting is throwing your money away”) have seen business slow to a trickle. [By the way, if you still believe the canard that renting is throwing your money away, please do the math.]

Mortgage brokers and lenders–who, with the help of Wall Street’s securitization machine, shoveled credit to anyone with a pulse–are going out of business at an amazing clip.

Homeowners, especially those that bought recently, may be coming out quite well, relatively speaking. If you consider than many put in little or no equity to start, they basically lose little in foreclosure.

Those who did put money down and are suffering losses are doing so because they made a very poor decision to buy a house at the top of the market. That’s nobody’s fault but their own.

So part of the good news here is that those who should be suffering–irresponsible borrowers, foolish investors, enabler Wall Street banks, brain-dead real estate professionals, and predatory lenders–are indeed suffering.

Another piece of good news: house prices are falling. The beauty of market economies is that unsustainable market dynamics are, well, unsustainable……irrational prices don’t stay that way for long. After another couple years of renting, those of us who didn’t buy a house will be able to buy one at a reasonable price. In the meantime, we take comfort in knowing that renting IS better than buying. Here, once again, is why.

All of the above could be read as an endorsement of unfettered capitalism. It shouldn’t be. The rest of us may very well suffer from the bad decisions of others. Decisions that probably wouldn’t have been made had there been reasonable regulations for mortgage lender, for credit rating agencies and perhaps for capital levels and underwriting practices at Fannie, Freddie and other large financial institutions.

But we didn’t have reasonable regulation and the market was left to its own devices. I can see a few ways the rest of us will suffer as a result.

1. Banks are going to fail. When they do, deposits may be lost. Sure there’s FDIC insurance, but only for deposits up to $100k.
2. The implosion of credit markets means even good borrowers have no access to credit. If banks have no money to lend, well, they aren’t going to lend to anyone.
3. When the BIG financial institutions fail (Fannie/Freddie/Countrywide for sure…Bear Stearns, Citi, WaMu and dozens of regional banks potentially) the government will have to bail them out or risk depression. The government isn’t some big all-powerful entity, it’s taxpayers. Hundreds of billions of your tax dollars will have to be spent on bail outs.
4. The Fed is already trying to avoid that doomsday scenario by using interest rate cuts to take pressure off the economy. That’s spurring inflation and the dollar’s precipitous fall against other currencies. Who pays the price? Anyone with dollars in their wallet or a savings account since those dollars by less today than they did a year ago.

What to do? That’s a tough one. I can tell you what I’ve done: a year ago I sold out of the stock market and put most of my savings in money market mutual funds. 5% of my assets went into exchange traded funds that track the Euro and the British Pound, not enough as it turns out. Recently I also bought some muni bonds. Lastly, I put some cash under my mattress. (Actually in a safe deposit box, but the idea is the same) Unfortunately, with the exception of the euros and pounds, I’m very vulnerable to inflation. And it’s probably too late to buy gold…..

………………
Read other posts on OptionARMageddon:

Capital Raising, Merrill trickery

Fannie/Freddie may need to raise MUCH more capital
A Great Society No Longer? Interview with GAO chief David Walker
Walking Away……
Sanity at last? Paulson rejects bailouts
CDS, a hedge-funder’s view
Baltimore Sun Op-Ed: Ron Paul calls it on Fannie and Freddie

5 comments

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Because they are intentionally destroying the dollar. The dollar is one of the last things standing in the way of a North American Union (EU style) with a new currency, no trade boundaries, and unfortunately essentially no borders.It sounds like a conspiracy theory, but unfortunately its the only thing that explains the entire actions of the government, on every front. Economy, check. Border, check. Giving billions to Mexico, check.

Posted by Brian | Report as abusive

Oh RW you are my little econ prince. This actually will solve an argument I was having with the bf the other day, but I couldn’t explain it properly (without using the words “thingy” and “the other thingy”). He was also wouldn’t accept that “I’m smarter than you, just accept that I’m right,” was a valid and logical argument

Posted by Rachel | Report as abusive

Why do you think China will use inflated US dollars to buy US bond?They should and they will buy gold from US. Which is the reason why gold price popped up so fast?

Posted by michael lee | Report as abusive

Actually, if you look at Yuan exchange rates, they’ve already “depegged”. We’ve started to loose value to the Yuan just in the last year, pointing to a non-vocal move by them into the euro. They did exactly as our Congress yelled at them to do, stop pegging the Yuan to the dollar.

Posted by LtRand | Report as abusive

[...] long ago, I wrote a post about the dollar’s value and its relationship to interest rates. Part of that piece was [...]

Normally as a currency falls imports become expensive and exports become cheap to others, hence leading to improvements in the balance of payments.

Unfortunately in the case of the USA made in the “US of A” is not a thing globally associated with anything except Jets and weapons. So what would we sell to the world? movies? songs? I think most countries have their own. I do not think a cheaper Harry Potter will occur anyway.

Posted by JackoByte | Report as abusive