Kaput!

We've lost 20% of our net worth over that last year and an additional 20% over the last two weeks and, probably, we have not hit bottom yet. I've been railing about deregulation for years; I believe in capitalism and in a free economy but there must be rules by which to play. As Eric Lane and Michael Orskes so eloquently explained in "The Genius of America", there is a basic difference between the Articles of Confederation and the Constitution; the former assumed that man is unselfish and ready to sacrifice self-interest for the common good while the latter - drafted fourteen years later and after the new republic had almost collapsed because of individual self-serving - acknowledged that man is selfish and that the social conract must recognize this and enact a set of rules aimed at protecting the common good from individual greed. It is thanks to this underlying principle that the USA became the greatest democracy and has enjoyed unparalleled success both politically and economically. After the economy last collapsed, in 1929, FDR enacted regulatory agencies and laws aimed at protecting us from the greed of those who had great economic power. After decades of prosperity the laissez-faire, Republicans believed it was time to deregulate and what followed was an orgy of greed. They should have learned their lesson from the Savings and Loans Banks debacle but, since we do not hold our politicians accountable for the disasters they create, after the taxpayer paid the bill the banquet went on. Top executive salaries were totally out of proportion with their actual contribution to the companies they were managing and kept growing even as operating results worsened. These bonuses were geared to short term results; consequently, being greedy humans, the CEO's operated their companies so as to maximize short-term results - and their bonuses - and believed, like King Louis XIV: "apres nous le deluge". Banks looked for ever-more risky venues to lend money they had in abundance and credit card companies offered their clients what seemed to be an easy way to live above one's means. The Domocrats, however, share in the blame. They didn't realize that the light some were seeing at the end on the tunnel was an oncoming train and they didn't do much to stop the excesses. Furthermore, wanting to give all Americans a better shot at owning a house, they encouraged Fannie Mae and Freddy Mac to give out mortgages with little or no down payment even to purchasers that would, otherwise, not have been considered credit worthy. Now we are all paying for our government's irresponsible behaviour and those who created the mess are still not accountable. It will take years to regain what has been lost and, of course, most of FDR's regulations - and maybe more - will be reinstated. Had we not chosen to overlook man's natural greed - which was ever visible and obvious - we could have avoided this mess. I hope that in the future we shall remember that a game can be played succesfully only if there are well established and recognized rules that evryone is held to play by. So what can be done now? If I knew for certain I'd interrupt my blogging and fly to Washington to fix things... All I can do is to conjecture, so here it goes. I would have the government buy from the banks all the bad mortgages and all the greatly devalued securitized mortgage paper at a maximum discount, giving the sellers just enough to keep them from going bankrupt. They and their shareholder would take a big hit but, with conservative management, they would be in a position to do profitable business and to pull themselves up by their shoestrings. Then I would set up an agency - if one doesn't exist already that could fulfill this role - that would try to workout with deserving homeowners refinincing that the latter can live with. For example, a $100,000 mortgage the government will have bought for 40 cents on the dollar could be reissued as a $50,000 or $60,000 mortgage that the borrower could sustain while giving the government (ergo the taxpayer) a margin to cover expenses and, maybe, make a small profit. This would clear the balance sheets of the banks and provide them with the liquidity needed to go on operating. I would establish a minimum downpayment percentage to purchase a house, would give mortgages only to credit worthy buyers and forbid any mortgage that is not fixed rate. Both of the above should help resolve the housing problem and put home purchases back on a healthy path. As I had already suggested in 1989, I would forbid automatic, computer generated sale programs: they turn a small snow slide into an avalanche and give those who operate them an unfair advantage over the small investor who needs to follow the market, make a sale decision and then put in an order. I would not forbid short selling but I would instruct the SEC to keep a close eye on this activity and stop it when it appaers to get out of hand, influencing unduely to market. I would review the activities of credit card companies, put some limits - based on credit-worthiness - on how much any individual can borrow in total on credit cards and, having reduced the risk of the lender, I would lower substantially the maximum interests that can be charged on credit card debits while regulating also the amount of fees that can be charged for late payment. Undoubtedly, this would haver a deflationary effect and shrink a number of industries but, from there, we could grow in a healthy fashion rather than running once more like lemmings toward the cliff. Finally, I would regulate executive compensation. If I have learned anything over the last 45 years it is tha no one is indispensible. We must debunk the myth that, having scratched and clwed his or her way to the top of a publicly owned company an executive should be able to secure him/herself much of the cream before the shareholders, whose capital is at risk, can earn their profit. I had believed that the junk bond fenomenon had opened the tower of power to many who had been excluded from it, finally putting a break on executive abuses such as company paid country club memberships, private school tuition for their children, etc. Unfortunately, it is obvious that, if unregulated, top executives will always find ways to steel from the absentee owners of their companies, the shareholders. I am certain that neither Republicans nor Democrats would like my suggestions; that is why we need leadership that cares about the future of the country  and can detach itself from right wing or left wing demagoguery.

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Also, priced oil for more oil at lower future prices, barrel transaction. http://futures.morewrite.com/2008/01/29/have-managed-futures-provided-a-hedge-against-inflation/531/future-payment/