Another bad week! We should be getting use to it. We are now at extreme levels of bearishness which are usually only seen at correction lows. That along with the fact that the politicians have finally gotten around to the housing industry, where it all began, is encouraging. The plan, however seems to be dividing the country into two camps, Those who have been fiscally responsible vs. those who have not. All across the country we are hearing rants about how those of us who have paid our bills on time are now going to be forced to help pay for those folks who were irresponsible.
The prevailing opinion seem to be “Let the banks fail, let the automakers fail, let my neighbors declare bankruptcy. Don’t use my tax money to bail out those who are in trouble.” I can understand their feeling that way. I’m one of those that has a job and have been paying my bills and living within my means.
The problem is that the problem will keep getting bigger and we will end up in a DEPRESSION instead of a recession if something isn’t done to bring things back into balance. If that happens, we all lose. That is the bottom line.
The real blame for all of this is the poor job that the Government did in its oversight of Wall Street and the Banks.
The financial industry was driven by GREED. They paid big bonuses for inventing “new investment products” to sell that looked safe but were anything but safe. Leverage. That was the key to it all. Take Adjustable Rate Mortgages and sell them to people who couldn’t afford to pay for them if interest rates went up. Then roll the mortgages into derivative securities with a small amount of “Insured Mortgages” and sell them as a AAA investment they called CDO’s (collateralized debt obligations).
Where was the SEC?
The Security and Exchange Commission (SEC) was being run by the same people who had been big shots at Wall Street firms. Our new Sec. of the Treasury is also a former Wall Street big shot, who by the way forgot to pay his taxes for a few years, until he was put up for the job. And now he is in charge of the IRS. They all belong to the “Good ‘ol boy club” the same as his predecessor Hank Paulson.
Add to that the growth in Hedge Funds,that are exempt from most of the SEC rules and used a high degree of leverage. And spice things up with the CFTC (Commodities Futures Trading Commission) rule of only requiring a 5% margin and you have the recipe for a disaster waiting to happen. And it did happen. Speculators, some of who were big wall street firms, were able to control a million dollars worth of oil futures contracts for only $50,000. Speculators went from owning just 32% of the contracts, to owning almost 80% of them and the price of oil went to$147 a barrel and gasoline went to $4 a gallon. This caused everything we buy to go up in price due to delivery costs going up, leaving us with less money. And mortgage defaults started going up, and up,and up some more.
I was a young boy during the Depression in the 1930. If you have never lived through one, consider yourself lucky. We need to do everything possible to keep that from happening this time around. Unemployment went to 25% in 1932 and we were in bad shape until 1941 when WWII came along and turned things around.
As much as we don’t like it, history seems to dictate that the government is going about it in the right way by keeping the Banks and Autos above water, and now doing some thing to help out in the mortgage area. The medicine doesn’t taste good but is necessary to stave off another depression.
NEXT WEEK:
We are staying on the sidelines for now, watching what this next week will bring. Don’t be surprised if it’s an up week. The market is very oversold and could have a bounce somewhere in here.
