Saturday, January 17, 2009

What sequence of events caused the mess?

Hedge fund executive Oscar Schafer in a Barron's interview (January 12, 2009, "Hang on Tight!") described our current economic condition thus: "The world is experiencing a giant margin call."

Yes, a giant margin call enabled by easy credit extended to millions of people who couldn't afford as much home as they purchased, or cashed out equity to finance a lifestyle they couldn't afford, before defaulting on their mortgages which equated to securitized time bombs that were gobbled up by over-leveraged financial institutions. 

How did it all happen?

It began with policy makers in Washington who wanted to guarantee home ownership for anyone with a pulse. The Fed left open the spigot of cheap money by keeping rates too low for too long and America became intoxicated by illusory home price appreciation.

This party was joined by money center moguls trying to juice returns by making big bets upon this whole sorry misuse of credit, until the house of cards collapsed.  Millions of people, who either ought to have remained renters until their income and assets could justify any mortgage, or who should have purchased more modest homes at fixed rates, were enabled by government-coddled institutions like Fannie and Freddie and populist legislation to "invest in our communities".  

The risks they took (policy makers, investment banks and millions of  Americans), have poisoned the well that the rest of us must drink from -- perhaps for decades. Now we hear that the other shoe to drop will come from commercial credit busts, or the next highest risk level of mortgages above subprime.  

This turmoil all has the same antecedent -- greed. Grandma warned us when we were children.  If you can't afford it -- don't buy it. If you can't afford to lose it -- don't risk it. In short, live within your meansGreed is the same thing that destroyed Rome. How will we get treatment and beat our addiction to debt before we all go down in flames?

Thursday, January 15, 2009

A president's farewell

I felt sorry for him as he approached the lectern with a sheepish smile.

As Kissinger reminded Nixon, history will treat him better than his contemporaries. His policies precluded another attack since 9/11. To conclude otherwise is to posit that the other side simply stopped trying to harm us after 9/11.  The President deserves credit and at least grudging acknowledgement from his political opponents -- for stalwart efforts to fight terrorism and protect Americans.  

I'm reminded of another parallel with Nixon. Richard Nixon asked readers this question in one of his later books: if America does not lead in this world -- who will?

I repeated the question in one of my columns and a rebuttal came from a letter writer who declared that the correct answer to this question is -- the "leaders" of other countries.  Unfortunately, the world has always been replete with 'leaders' like Stalin, Hitler and Hussein that refuse to back down.  

This President did not have the luxury of presiding over a relatively peaceful world where "constructive engagement" with rogue nations -- or recalcitrant allies -- would've been the wise course. The safety of American citizens has been this President's overriding concern.  That fact will endure as a positive part of his legacy, even if the Iraq invasion does not. 

George W. Bush
Finally, his administration failed to stem the profligate federal spending we have seen during the last eight years -- punctuated with a new drug program we can ill afford; but that's a trend the new administration appears destined to continue.

Wednesday, January 14, 2009

Cartoon feedback to my last post

Regarding point #2 from my previous post concerning Al Franken, I'd like to thank my nephew who alerted me to an outstanding political cartoon (from Michael Ramirez a two-time American Pulitzer Prize-winning editorial cartoonist.).  Even if I could draw, I couldn't improve on the way Mr. Ramirez makes his point in IBD.