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Stock Ideas Investors Daily Edge Buzzwords Confuse Economic Crisis Facts
Stock Ideas Investors Daily Edge Buzzwords Confuse Economic Crisis Facts 
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By Rick Pendergraft After a disappointing set of economic reports last week, the market will be looking for better news on the economic front this week. And there are several headline grabbers to choose from. |
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| Buzzwords Confuse Economic Crisis Facts |
| Friday, 17 October 2008 | ||||||||
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Quote of the week: “He who winks the eye causes trouble…” Proverbs 10:10 Eleven thoughts on the past week: 1) Six people thought last week’s piece was a tad too political. Though they are but six out of 300,000, they seemed so angry, even forlorn, that I thought I’d just stick with the economy this week. 2) Tracking the hidden meaning of buzzwords is one of my favorite minor pastimes. If I wink at you and suggest that welfare mothers are wrecking the country – you all know to whom it is I am referring. And, that’s despite the fact that Caucasians received the overwhelming majority of the US’s welfare. If I refer to certain types of abortions as “partial birth,” you could confidently surmise my political leanings. That’s why I was taken by how quickly the federal law known as the Community Reinvestment Act has become a buzzword phrase. The 30-year old Act is the bane of free market fundamentalists, deregulationists, screaming talk-show hosts and over-heated columnists. The Act came to life under President Jimmy Carter. It’s why the above-noted bloviators use it to suggest that the current financial crisis is wholly the Democrats doing… though for some reason these critics attribute the CRA to President Bill Clinton… a boy who just wanted to have fun. “No fair blaming eight years of a Republican presidency and 12 years of a GOP majority congress (1994 to 2006) for the US’s economic owes,” these critics and faux experts bellow. “Forcing banks to write risky loans to poor people is what caused the current woes.” As usual, however, the truth is far different than what’s being told by those whose eight- and nine-figure salaries are dependent on keeping the masses stirred up with lies such as McCain is a brainwashed Commie, Obama is a Muslim or Palin had an abortion in college.
But, bunk is bunk. You see, the CRA only applies to banks and thrifts. That means it didn’t apply to companies such as Countrywide, Residential Capital, Hanover Capital, KKR Financial Holdings and Thornburg Mortgage. And it didn’t apply to any of the 251 mortgage companies that have failed since 2005. Please accept my apologies for injecting actual facts into this financial missive. 3) So some of you won’t go all Freddie and Fannie when responding to the facts as laid out above, accept these facts, too. It was the president and his party’s congress that put the pressure on the two GSEs to become way more profitable… to buy riskier and riskier loan bundles. The calendar doesn’t lie. The two-year, adjustable-rate mortgage default explosion ignited in November 2006 and really popped in February of 2007. Simple math suggests that those loans were written in 2004 and 2005 and purchased in bundles by Fannie and Freddie back then, too. Simple math also shows that there are media guys making $4 million, $8 million, $20 million… even hundreds of millions by peddling you a crock of sh… shameless half-truths and lies when it comes to the economy. 5) Here’s what happens in the blame game. When we agree with someone about what or who is to blame for the state of the US economy we let things end right there. When we disagree with someone over what or who is to blame for the state of the US economy we generally say, “Yeah, so what. It’s easy to place blame and I am tired of hearing it. What I want to hear is your solution.” Doesn’t this reaction seem backwards to you? 6) Banks and thrifts hate the Community Reinvestment Act. You see, in order to write the kind of mortgages that low- and middle-income people can afford to pay back, the banks and thrifts have to wave a bunch of pernicious fees (that they charge you and me) and offer lower interest rates. That means CRA loans are not as profitable. 7) Banks and thrifts also hate the CRA because it means that they can’t close branches in poorer or middle-class neighborhoods. 8) I hope you are as fascinated as I am by some of the other rhetoric surrounding the US’s economic woes. My favorite examples are offered by those who favor deregulation. They say we don’t need new regulations to manage the financial markets. That’s because there are already plenty of regulations in place that – if only enforced – could have prevented the US’s current economic heartache. If we assume that argument is not facile, then we need to ask one question. Why, between 2000 and 2008, didn’t the people in charge of the US government make their employees (cabinet officials and others) enforce existing laws and regulations that dealt with financial institutions and economic matters? 9) The idea that people are bailing out of their 401k plans is one I find ridiculous. Yes, some people may be borrowing against them in order to avoid foreclosures. And, that alone is a tough row to hoe. They have to pay that money back. And, the interest that they pay on the loan is subject to double taxation. That means not only is that money taxable when they withdraw it, but they pay the interest on the loan with after-tax money. But, pulling out altogether is crazy. Not only will people under 59 years old pay a 10% early withdrawal penalty, but they’ll have to pay taxes on that money, too. Maybe there are some hopelessly desperate people that have to do this. But, only crazy people close their 401k in reaction to market madness. Only crazier people believe a 401k exodus is happening en mass. 10) I think selling into a rally makes no sense – unless that is, you believe the panicked class who thinks the US is doomed… dooooooooomed, I say, dooooomed… and your current losses are the best you’ll ever do. Then again, if you believe the gods of galloping fear, you’ve probably been out of the markets since 1999 anyway. Because Y2K was going to wipe you out… or maybe you got out in 2003 when SARs was going to be a worldwide epidemic… or you were definitely out in 2005 when avian flu (Y2Flu) was going to destroy the planet. Either way, the princes of panic or the high priests of the heebie-jeebies have long ago scared the pants off you… wallets included. 11) Asia economies will be the first to bounce back from the worldwide economic slowdown. That’s because most of them are cash rich. That means you need to consider Asian stocks soon, because stocks bounce back well before an economic recovery begins. That’ll do it for this week’s commentary. Have a great weekend. Andy P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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