We are witnessing the beginning of the end of capitalism. The patient is not even close to bedridden, there is no real pain (especially in light of what will be felt later), no spots or swelling to speak of, and there is only a nagging, persistent cough at the moment. But make no mistake; the wrong treatment will kill it more quickly than doing nothing and letting the disease run its course.
The fools in charge of the monetary regulatory commissions, in concert with the fools in charge of the banks and lending institutions, have allowed the fools who couldn't be trusted to pay for their own Happy Meal at McDonald's to put the rest of us in a real fix. Thanks, y'all.......
There was a time when home ownership meant something. Specifically, it meant that the homeowner was responsible, stable, and honorable when it came to paying the bills. Not so long ago, a prospective borrower who had less than 50% of the home price to put down was laughed out of the bank.
But then money became devalued through ruinous fiscal policies in Washington, including taking the dollar off the gold standard, over-regulatory responses to the 70's gasoline supply issues, over-regulatory responses to the S&L crisis, over-regulatory responses to the internet bubble and post-911 'recession', and political correctness moving from the campus directly to the boardroom.
Money became so cheap, and interest rates so low, that EVERYONE was getting a mortgage. We all know the stories by now; interest-free, subprime, overbuying, flipping, ARMs, etc. What most people do not realize is that the government was all but demanding that banks provide new loan packages designed to provide a mortgage to people who previously could not even qualify for a credit line. The banks responded, every borrower got mortgages, every banker got money, and the market roared its bullish roar.
Everyone was now a homeowner, many in houses that were ridiculously beyond their means. Mortgage is in excess of 25% of your take-home? No biggie.... Your ARM readjusts in 6 months? Whatever..... Yeah, you have to pay the HOA fee on top of your mortgage or your water will get shut off..... Just refinance, baby....pay off those cards and get that new car because you're living in an ATM! Better yet, get more cards because you have a lot of furniture to buy to fill up the rooms of that new McMansion!
Then the most predictable of things happened: people who were overextended started having problems....lates on the mortgage, bankruptcy, foreclosure, just walking away from the house that was supposed to be so easy to pay for.....
Now the next most predictable of things is happening: the same financial geniuses who put pressure on the banks to lend to deadbeats, are now banging the drum to force those banks to forgive the loans, reduce the interest rates, provide the borrowers with bigger cushions of time. Madame Clinton even wants to use the power of government to force private businesses (banks) to go without collecting receivables for 6 months. The rest of the fools in congress are not much better, having a multitude of opinions on "how to fix this problem" that are socialist, fascist, and/or as equally poorly thought-out as the initial pressures to force banks to lend to deadbeats were in the first place.
Today we have the Fed manipulating the prime lending rate 3/4 of a percent at a time. Remember when Alan Greenspan got the quivers from adjusting it 1/4 of a percent? Moving the rate so low (we currently have 2.25% of room left) gives us ZERO headroom later. We have the President and Congress using the standard Election Year Bribe to pre-refund next year's tax returns. All around the decision-makers are trying to force us to buy, buy buy.....
It is lie, lie, lie. The wild swing of the prime rate may boost the Dow for a few days, but as long as the credit crunch continues, in concert with rising energy and cost-of-living prices and a dollar that is worth less by the minute, there will be no dancing in the Wall streets. The bulls are gone, and the bears are here to stay. In this atmosphere Ben Bernanke seems to think that tinkering with the Great Machine is a good idea.....
*THIS* is the real danger to our patient, Capitalism. Tinkering and manipulating things that are beyond the understanding of those playing around with it. Dropping the Fed .75% in one day is the financial equivalent of applying leeches to the arm when the patient has bowel cancer.
The absolutely correct course of action is:
To. Do. NOTHING.
1. The Fed should stop immediately. Leave the Prime where it's at.
2. Congress should spend some time naming libraries. Stay out of money; you didn't make it and you don't understand it.
3. Banks should let these loans fail and take their lumps. They overextended themselves, and their stocks will suffer accordingly.
4. Borrowers should sit down and realize what they've done. Sell the house while you can. You've overextended yourself and now have a huge house you can't pay for.
5. Everyone should begin to pay down debts as quickly as possible. It's suicide to pay someone else for the privilege of owing them money. And once they have their money, not only are you free but the former creditors are also more liquid and healthy. Hmmmm, stock, anyone?
6. With the prime so low, saving is pointless (for growth) -- keep some emergency money, but liquidate as much as possible to pay off debts.
7. Invest in Bear funds, gold and oil stocks, etc. For the immediate future, betting against the dollar and against our market growth will yield the wise investor plenty. There is nothing more capitalist than making money when the market is down, and it IS American to bet against America occasionally.
The Market WILL sort this out. It will hurt (if one is not positioned right). It will cost (if one is thinking in Standard terms). It will last awhile. And many people will be in financial crisis for the next few years. These people got themselves into trouble, and they will have to pay for it.
It's called a Correction for a reason. Real capitalists understand this and embrace it, seeing an opportunity to make money when others don't. The socialists in charge are proving with every action that they neither know nor care about how money and wealth-building are done. As long as their pockets are lined by constituents, lobbyists, or their own little government fiefdom, they cannot and will not see the real problem, let alone the solution.
To force responsible borrowers and taxpayers to bail out deadbeats and bad banking decisions is not only unfair, it is DEADLY to the very nature and existence of capitalism.
Sadly, I predict that most of my cautions and advice will go unheeded. The Congressional Meddlers and Fed Witch Doctors will continue to stick the Fork of Wishes into the Outlet of Unintended Consequences, and we will all get shocked very badly. In the meantime, the Deadbeats, like old movie zombies, will continue to grow their population and accordingly, their danger to the ones who were smart enough not to walk in the graveyard at midnight.
That cough is getting a little worse; think I'll lie down for awhile until the fever passes......