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Wednesday, December 19, 2007

The Credit Crisis: Airelon's take . . .

Ok, bear with me for a bit, because I had a bit of a rant the other day when the subject of the credit crisis came up. And why have a blog if you can't repeat a bit of your own rantings? Right?

First of all, I think human beings biggest faults has contributed to the problem. Those faults are: 1) We think we can effectively rule other people. We think we can effectively manage the earth all on our own. The more we try, the more we screw it up. 2) Any time you collect individuals into a massive human institution, we have a nasty little trait that arises. As a group, we are inherently selfish and if we see a short-term benefit to ourselves, we will take that solution over the long term solution every time. As a collective species, we do what is best for own own interests in the short term, with absolutely no thought as to how it will affect us in 15 years. Much less 200 years. Humans take the attitude of "We'll figure it out" and just do what is best for us in the short-term, rationalizing away any possible dangers. Thus, we don't make it easy for everyone to attain wealth. Since we view things in the short-term - we see wealth as a zero-sum game, and try to grab our 'spoon' as it were from everyone else. We all, rich and poor alike, end up being at fault for class disparity. Instead of realizing that over time, wealth can be created.

If the weaker individual is not as smart as a more powerful human institution? We as a species, (or a human institution) will always take advantage of the individual. See the sub-prime mess for an example. Folks who did not realize what were going on? Did corporate investing institutions ever stop to consider the morality of what they were doing with ARM's? Nope. The human institution only saw the short term benefit to themselves, at the expense of those individuals who were not as financially savvy or intelligent. And human nature proved itself once again.

I remember telling people in the 1990's to live under their means, and that was the way to financial prosperity. They were laughing at me, because they put zero down on a $250,000 house (In my market, that would have bought you a 2500 - 3000 sq ft plus home), driving two brand new cars, had great jobs and were looking at me, who insists on renting my home, drives certified pre-owned vehicles and won't spend $1 unless I have $10 behind it (I try to keep to a literal, strict, 10%) I was dumb, because Greenspan - instead of taking advantage of the situation and tempering growth - is fanning the flames with all his might and people are living off the easy credit that was available. But I was the dummy?

How does Greenspan respond to such charges? I was watching an interview with that "gentleman" recently, and he had the audacity to say: "I would like to think that I helped take this country to the advantages of a risk premium, and that will be my legacy". Yeah, that's your legacy all right. You 'risked' us up to our eyeballs in debt, so that when the boon ended - we've painted ourselves in a corner. He lowered and lowered and lowered the rate. Then, when there was nothing left to do during an economic boon - and LCTM is going bust? What did he do? Hey, I got it! Let's lower the rate! to bail out a fund during the largest economic boon in our history.

Now - because Bernake inheireted a complete and utter freaking disaster - and he's doing his best to get us out of it - people are crying that "Things aren't as good as when Greenspan was at the helm"; and complaining against Bernanke's policies. Greenspan knew enough when to get out, and look squeaky clean in the process. Gotta give the man props for that sort of maneouvering.

I can't believe that people are looking to Greenspan of all people, for interviews and such during this credit crisis. If anything, he should be thankful he's avoided a public lynching at the DC Mall.

Now I'm not going to go on a Jim Cramer rant here. I thought that whole thing was sad. I understand it. But Jim is a victim of the mentality that Greenspan created. And after watching Bernake a bit, I think the Fed is doing exactly the right thing. Took me a bit to see it, because I knew Bernake's statements weren't making any sense at all. Anyone with half a brain knows that a .25 cut does nothing to avoid a recession. Heck, if rate cut after rate cut (was it 6 whole points?) didn't stop the mild recession in 2001 (a bubble by the way, that Greenspan caused) - what the hell is a .25 rate cut going to do to a much larger crisis? But I knew that Bernake is smart enough to have known that. I think the man is smart enough to know that if he cut the rates as drastically as the "gentleman" that came before him, we'd have nothing short of a collapse of our currency. Worldwide.

And again, I think Berneke is smart enough to know this. But the man has a very, very serious problem on his hands.

He has a stock market, that now has everyone's 401k's tied to it - that has come to expect "Fix the problem with a rate cut" perception. Hell, your average joe doesn't even know what a rate cut is. But it's that perception that he has to deal with. Jim Cramer is wrong. If Bernake was being an academic about it, he wouldn't have cut the rate at all, and told the Market to go to hell. That'd be the 'textbook' thing to do. But he's dealing with a country of people that has their retirement (401k's) tied up in something they know absolutely nothing about. They think when their 401k is up 200k, they've made 200k worth of money. They think that if their 401k goes down 40k, that they just lost 40k. The most they know, since Greenspan taught them, is that a rate cut is good for the stock market, so Bernake needs to cut the rate for my 401k. That's it. That's everything they know.

So what does Bernake do? He gives them a measley .25 rate cut and tries to soften the blow, and give the mild perception of doing something. Hell, I think people will be studying the way Bernake has handled this thing for years. Because in my book, he's made a lot smarter moves than I would have, if I was in his position. Is he in a corner? Yeup. Is he 'destroying the dollar'. Well, the rate cuts haven't helped. But they were only .25, and he had his back up against the wall. At the same time, he's trying to get the money to flow. China is onboard now, for the first time, being a contributor to the World Bank fund. The way I see it . . . he is trying, ever so gently, to get us out of it. He has to deal with the inflation that's about to hit us. Keep our dollar stable, and on the other hand, not have everyone 401k's go under, as Banks try to figure out how to make money by just owning a home that's been foreclosed on, and won't sell. He has to deal with realities of what he was dealt on the one hand, and get us where we need to be on the other. It's a race against time. A Tokugawa delaying tactic, I think is what he is going for. I think he's doing a good as job as can be expected.

This is why I view a recent statement by Buffet so important. He said:

"In the 20th century, real standard of living increased seven-fold. That was unprecedented, and included the Great Depression and other scares. The American system has unleashed the greatest potential of its citizens. Back in 1790, China had 290 million people, and America had 4 million. But today look where we are at. We will be better off in the future, the real question is how it will be shared." - Warren Buffett

"How it will be shared." A powerful statement. Education. I see the obligation of the wealthy to educate those without wealth, to accumulate it, while balancing growth and consumption. It is not in our best interests to keep that wealth to ourselves. It is only another red check mark against us, when considering our debt situation. While socialistic and communistic ideals are insane, and lead to ruin, it'd be nuts to not realize you can only keep wealth to yourself for so long - before it leads to class clashes. The smart road, and to my mind - what we need to focus in on, more than anything else, is that last statement. We have to learn how to educate others in the U.S. - so that they can partake in wealth as well. People will accept a disparity between classes only so long as they do believe it's possible for 'the little guy' to make it. When they feel that the little guy has absolutely no hope, then in the end, the wealthy will end up footing the bill.

Balanced education on accumulating wealth is difficult to find, but I see it as oohhh so necessary to continued prosperity in the United States.

This is why the education of the public when it comes to finances as so vital. People just don't know. It's not their fault. They don't teach economics, serious economics - in High School. Every graduation I go to, I ask the person I know that is graduating to "Tell me who wrote the "Wealth of Nations" and why it important to your life right now?" Not one kid graduating High School has even been able to tell me who Adam Smith was. It's not the kids fault. He was never taught properly anything having to do with handling his or her own money; and lives with Mom / Dad who buys them every gadget under the sun - from an bubble economy that was created by their own government! And NOW that government is going to act "Mr. Responsible", wash their hands of it and say "We don't bail out lenders" ? Sure that's the responsible thing to do in an ideal situation. But this country has come to expect it. So again, it comes back to what do you do? You're damned if you do, and damned if you don't. I think Bernake is trying to give the perception, delay a bit, let the market factor prices in. Some of the stuff he says is bullcrap, and I think he knows it's bullcrap as he's saying it. He's just delaying as he tries to build liquidity safely.

One more thing. Now we have a crisis, and instead of trying to act intelligently about it, as Bernake is doing? People who have been mongering 'fear' for as long as I've been in this business are really starting to spout off - and doing nothing to help. They write articles discussing how to 'invest in gold' because of a world-wide market collapse. That isn't the answer either. Fear will only immobolize the situation, and make it worse than it is. Fear is a reaction. Not a solution. Neither is buying Gold. That, again, is looking at the short term, for only the individuals benefit.

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