Tuesday, September 30, 2008

Now What?

Dear Friends,

Today's post sets a new record for me - three days in a row you have chosen to look at what some retired Colonel has to say about the world of arcane financial jibberish.

I believe it was Thomas Jefferson who once said, "No man or his property are safe while the legislature is in session."  Yesterday was a really good example of the truth of TJ's statement.

 By 23 votes, the House voted down the Emergency Economic Stabilization Act of 2008, meaning that we get to start all over again to save the economy.  Those 23 votes sent the markets into a 777 point tailspin, and $1.2 Trillion dollars of wealth was wiped out on Wall Street.

I know these big numbers are hard to grasp, but one trillion is a million millions.  Our entire annual economy is only 13 trillion.  Eliminating $1.2 trillion dollars worth of wealth in one day may not immediately affect you, but for those Americans now living off their hard earned retirement savings, the losses to their 401k's and IRA's, the continuing fall in the value of their homes, their inability to get a new loan to buy a downsized place , the lack of buyers to take their old, too large, home off their hands - all of these things are not paper losses. 

For those of you who see more homes for sale in your neighborhood, some from foreclosures, the value of your homes will soon decline even faster.  Smart homeowner's associations will have to start hiring landscape firms to keep neighborhoods from going to seed. 

For the small business who, for cash flow smoothing purposes, borrows regularly to make payroll or to purchase inventory, the growing inability to get credit at any reasonable rate may require them to close shop.

For those who would like a car loan or to increase a student loan, the ability to borrow is rapidly drying up.

No, the sky is not falling.  But the failure of the credit markets is not just a Wall Street problem.  It will affect all of us, some sooner than others, but ALL eventually.  One  retiree of whom I read said that the 30% loss in his IRA's over the last two months means that he will now have to plan for he and his wife to live for a 30% shorter period...

Another of my USMA classmates who is financially saavy  was spot on when he said, "If the die-hard liberals continue to stress Main Street and the die-hard conservatives continue to stress Wall Street, the result will be all of us heading down Die Hard Street."

Today's market has come back a bit, but on very thin volume.  Thank God for Rosh Hashanah, the Jewish New Year, which has given the Congress a chance to rethink their Monday vote and the markets to take a deep breath. 

I have told my family that today, tomorrow and early Thursday will be great times to buy those stocks and funds that they have been considering.  Once the Congress comes back to actually do their job, instead of pointing fingers and pontificating, the markets should show substantial increases and the "bottom fishing" opportunities will be over.  Whatever they do, I advised, DON'T SELL LOW now and then BUY HIGH later, paying brokerage fees on both ends.

Some who have read my earlier post have asked why we have to spend $700 Billion all at once.
We don't.  In fact, the plan before the House would have given the SECTREAS $350 billion to start buying the toxic securities immediately in order to get them out of the Credit Markets.  The President could then authorize another $100 billion, if he saw the need.  The final $350 billion would be authorized only if the Congress did not object after 15 days of the request.

What we most certainly DO NOT WANT is the Congress approving the spending of each dollar of this fund.  Talk about special interests and pork?  That would be a herd of gargantuan hogs!  

These buy backs will take some time, since all financial institutions cannot be done at once, prices have to be determined, perhaps a reverse auction held, and conditions of the buy backs, such as the issuance of non-voting stock to the government, have to be negotiated.

Once the Feds own the toxic securities, the government will still get the income stream from the mortgages that are being paid regularly and the value of the securities may rise over time, perhaps even making a profit for all of us to use in reducing the deficit.  Major point is that, although we have to pony up $700 Billion at the start, this program almost certainly will not cost that much once completed. 

How about oversight?  The original Paulson Plan tried to minimize it, but Paulson is an economic animal, not a political one.  The Congress was not about to give anybody that kind of money and authority without their management in some form. The final bill which was defeated had SIX INDEPENDENT oversight entities or processes to ensure the taxpayers were protected:

1. An independent oversight board appointed by bi-partisan Congressional leaders.
2. An independent inspector general to oversee solely this Treasury function.
3. The GAO to set up an office inside the Treasury just to monitor and audit this program.
4.  SECTREAS actions will be subject to judicial review.
5.  Any and all Treasury bailout transactions must be disclosed to the public within two days.
6.  Monthly reports to two Congressional committees and an additional report for each $50            Billion in assets purchased.

To my mind, not even a brilliant ex-Chairman of Goldman Sachs could pull unethical tricks with such supervision.  Yet, thankfully, the Congress was smart enough to keep themselves out of the daily details.

There were also provisions to "punish" those greedy Wall Street executives, with options for the government to own non-voting stock, requirements for firms to pay into an insurance program for earlier purchases of mortgage-backed securities, elimination of "golden parachutes" for those executives who wish to depart rather than cooperate, and bonus payback penalties for those whose bonuses were based upon results which turned out to be bogus.  There were no provisions to "punish" those lawmakers who created these "sub-prime mortgages for everyone" programs.  Hopefully, someday they will answer at the ballot box.

Finally, there were provisions in the bill to help homeowners avoid foreclosure, help local community banks, give taxpayers an ownership stake in those firms being bailed out, and putting taxpayers first in line for the remaining assets of any participating firms that go belly up. 

But the bill failed by 23 votes.  When Congress comes back on Thursday, this problem will still be with us.  It will still be very serious.  As time passes the effects on both the credit market and the stock market will grow progressively worse and at alarming speed.

We need leaders and followers in Congress who will have the courage to apply First Aid.

Stop the bleeding, clear the airway, treat for shock!

The BLEEDING is the continual bickering and finger pointing between the "wing nuts" on both sides of the aisle.  They weren't elected to simply vote their email totals.  They were also elected to use their judgment on difficult and complex issues.

The AIRWAY is the constipation we have so graphically described earlier (and which many of you loved for its clarity...)  Cleanse the credit markets and the financial system of the toxic waste of mortgage backed securities...  And for those who asked that "some strings be attached to the enema to keep it from becoming diarrhea,"  there are plenty of strings in place as outlined above.

Fast, comprehensive and effective elimination of the blockages to the airway (or any other tubing in the body) will immediately treat the financial  and credit markets for SHOCK.  Lenders, borrowers, buyers and sellers will once again be able to value the financial instruments and corporate entities in which they are interested. 

The world will still be imperfect.  But there will be time to relook our regulation of the markets and to rethink some of our "social engineering" run amuk.  But we won't have done the very worst thing ------ nothing.  

Call your Congresscritter and tell him Kernal Ken sent you.  We only need 12 of those 23 votes to get this train back on the tracks...


The Dragonfly said...

Again Dad, clarity and concise explanations help a financial dimwit like me to understand.


Anonymous said...

What is the best way to educate the average American about the need to "Support" our economy? If everyone was able to stop, learn and understand the history that got us to where we are, the reality of what we are facing, the mechanics of the American economy, the role the credit market plays in those mechanics and the ability to realize that this is not a "bailout", but a "necessary support out" of our and the world's economies. Unfortunately, if we were to rely upon the average American to decide what should be done, we would have no "Support Out" or "Bail Out." The reality is, most average Americans have lost the ability to stop, learn and understand unless it is sent to them in an SMS text message, played on their iPod or broadcast to them on CNN. We are losing the ability to think and to see what is best for the entire US. I pray that we get over the fear of this Support package and that our elected leaders are smart enough and brave enough to take action.

Apis Melliflora said...

The worst part of all of this is the timing. Of course, there's never a good time, but for it to come a little over a month before a Presidential election, very bad.

Thanks for the continued enlightenment! The Kernal has a new mission, I think!

queenie said...

we say we haven't lost yet, cause we haven't sold yet.

Unknown said...

Thanks for your continued efforts to educate.

Rich blessings are in store ...

Unknown said...

Guess Jean and I are going to have to work a few more years. Sure would have loved to retire next year and only work part time. Another dream to defer.
Thanks so much for the clear, concise and educational post.
Keep it up.

Suzanne C said...

You have a way of explaining...Thanks for sharing your knowledge and expertise. this little bit of education lessens the fear the media is trying so hard to instil in all of is and inspires confidence in me...to make a wiser selection come election day! Thank you, sir!