Friday, October 3, 2008

And the new era begins...

The House just passed the financial rescue bill, and once W signs it in to law, we should hopefully be able to start fixing this economy. There's an up side too - the money won't add to the deficit, and could actually end up making a whole bunch of money and could take a big chunk out of the national debt. We'll see how it progresses...

Wait - I thought the free market was to blame...

With all the mess on Wall Street with the subprime mortgages, I have been hearing a lot of blame been thrown around as if it were fact. So far, I have found little that is. But the biggest thing that angers me is the idea that this is the fault of "Free-Market-Bush-Republican-Capitalist economic policies." Quite frankly, to say that the mortgage business was unregulated and a free market is an outright lie.

It all began with the Civil Rights Act of 1968, more commonly known as the Fair Housing Act, which outlawed various forms of Redlining, which prohibited banks from denying loans simply based on location. Not so free market friendly, but not so harmful. Things got ugly though in 1977 with the passage of the Community Reinvestment Act. The entire point of this Carter law was to make housing more affordable.

Stop right there. This is the beginning of the subprime mortgage debacle we are facing now. Forgive me if I'm wrong, but rarely is the purchase of a home considered "affordable." The purchase of a home is the biggest investment many people will make in their lifetime, and for most Americans, is the largest portion of household wealth. I know owning a house is the American dream, but sometimes people just can't afford to own their own home. Sorry. I would love to be driving a Ferrari right now, but I can't afford it. Well, if I had an interest-only payment plan, technically I could afford to drive one, but there would be little doubt that when the principal came due I would be in a pretty bad crunch. So why should housing be treated any differently? It's a luxury, not a right, and the idiots who felt they could force housing to be affordable to everyone should be in jail right now. Keep in mind, the biggest opponent of the CRA was the BANKING COMMUNITY!!! They did NOT want to make these loans that they knew wouldn’t be paid back, despite what the media says - it wasn't greed of the banks, but rather the meddling and goodwill of the law makers that really started this mess.

Back to the CRA. Part of the CRA literally made it illegal for Fannie Mae and Freddie Mac to only make prime loans. If you think about that for a second, the law requires Fannie and Freddie to make loans that normally banks would not make because the risk of not getting paid back is too high. This itself would negate the idea that this was a free market.

Through various rules and regulations, the CRA became the key source of power for the Association of Community Organizers for Reform Now, more commonly known as ACORN. The subject of CRA non-compliance was cited against many banks that did not want to make sub-prime loans because of the risk involved. Then ACORN would either sue, or protest the bank, sometimes even sending hundreds of activists into the bank to change dollars into pennies and back all day long - effectively shutting the branch's banking activities down until they complied and agreed to give a certain amount of loans to under-qualified borrowers. They have a term for that, and I believe the word is extortion. This should just go to further disprove the notation that this was a free and unregulated market.

Now, in now way am I implying that these forces are the reason we are in this mess. There are hundreds of factors that play in to this crisis. There certainly was predatory lending, greed, and lack of oversight in small situations. However, you must also fault someone who makes $50,000 a year that bought a house costing $300,000 with a pay-option ARM, or an interest only mortgage for borrowing money that they should've known they couldn't afford. It would take 6 years of salary just to pay off the house, and with living expenses and bills, it's just irrational to believe that they can pay off the loan within the terms, or even ever. Also, the relaxation of down payment requirements meant that people had little of their own money invested in the house, and walking away only hurt their credit.

My problem with regulation from the government is very simple - the government does not have the same goals and priorities that business have. While a business must look at the sustainability of its practices from a money perspective, the government does not always consider this in its enacting of regulations. There is no bigger example of the ruin of government regulation of an industry than the farming industry and its massive program of tariffs, subsidies, tax breaks, and laws that cost this country lots of money, and keep the market from progressing as it would in a free market. Imagine what they would do to the mortgage industry if they nationalized it too...

The cause of this problem we are having will most likely never be truly known, and every side will blame the other. However, the one place where the finger should not be pointed is at the free market. Time and time again, the free market takes care of itself - intervention is what turns it into a monster.

Tuesday, September 30, 2008

Why I'm excited about the market's "correction" and my retirement

Most people my age are not saving for retirement. Most aren't even thinking about it. I'll be done by the time most people start saving for it. If you're out of college and aren't saving everything you can, you should. It's all about time value money.

If you were to open a Roth IRA when you get out of college and start working full time (lets say 22 years old), and contribute $5000 dollars a year every year until you retire at 65. You'll have contributed $215,000 over that time span, and if you were to invest in relatively safe fixed-income securities yielding 5% a year, that nest egg will be worth over $755,000. If you're a little more risky and were to invest in the stock market with an annual rate of return of 10%, that nest egg will be worth an astounding $3,260,000! Now if you're a very astute investor and were somehow able to wrangle an impressive 15% a year, that $215,000 will have grown to over $15,530,000!!!

Lets say that you are more like the rest of America and don't start saving until your mid thirties (we'll say 35). You'll have contributed $150,000, and those same investments would be worth only $353,000 (5%), $909,000 (10%), and $2,504,000 (15%) - quite a difference from if you had been saving from the beginning. And, if you had been smart enough to use a Roth IRA structure, all that money would be withdrawn TAX-FREE! Now that's the power of money over time.

Some of you might be wondering why I'm so excited at the market falling. Well, simply, when the market falls like it has, everything is on sale. I can go in and buy stocks, ETF's, and get in to mutual funds at 30% discounts to what I think they are valued at, and over time they'll recover and their price will better reflect their true value. Just by adding money into the market while it's down I'll be able to get some gains just by buying when everyone else is freaking out. Yes, they may lose some more value in the short term, but I'll just continue to add money and get securities at discounted prices.

Oh, and don't go telling me that the market will never be the same, and that I'll just be losing money - the market WILL recover, and we WILL be a dominant country economically again. It may take several years, but things will get better - mark my words. Economies go through cycles of boom and bust - it's natural and it's what keeps the economy in check.

Gas crisis? Price gouging laws are bullsh*t

I went to 4 gas stations in metro Atlanta today before I found gas, and then I had to wait in line for more than an hour just to fill my tank up which got me thinking - why the hell is gas only $3.99 a gallon?!? As I sat there and watched frantic people fill their cars and sometimes even extra gas cans like gas was going out of style all I could think about was that the government was royally screwing this up (big surprise, eh?). What’s to blame though? Price gouging laws.

Price gouging laws were set up to keep businesses from profiting excessively in times of crisis at the expense of the people. And while I agree that jacking up the prices of food before a hurricane hits with no change in supply is a necessary law, gas shortages should be exempt. Yes, that means I do want to see higher gas prices when the pipelines dry up and the oil refineries are shut down. You see, the problem is that when supply is crippled and people start freaking out thinking that gas will never be available again, they all run to the pump and get as much gas as they can, especially when it's the same price as normal. That's why no one has any gas anymore.

Now what if we let the free market handle the situation instead of the government? Well, the reduction in supply would suggest that the price should go up; lets say for argument's sake that we have half the supply and the price doubles. Now, with gas at $8 a gallon, people start to change their actions. All of a sudden instead of filling up all their cars and rushing to the hardware store to buy all the 5-gallon gas cans they can get their hands on, and then filling those too, people get just as much gas as they need for the short term. At $8 a gallon, I would stop driving anywhere I didn't need to, and maybe I'd even take the abysmal public transport system. But one thing's for sure - my demand for gas would drop to only the bare necessities. Voila! No more gas shortage. Free market economics have successfully provided the most efficient allocation of resources, and the world is right again.

Some might say that gas doesn't work this way, however, and that it's demand is inelastic (doesn't change with price changes) but I say in short term crunches, a big enough jump in price would sufficiently change demand if the public feels that the price will come back down when the supply is back to normal and they'll be able to fill up at normal prices later. As for those "massive windfall profits" the gas station owners would make, well really they'll probably make the same amount of money that month, and if you're really concerned about them getting rich, then impose some sort of TEMPORARY windfall profits tax on them and use the proceeds to pay off some of the state's budget deficit.

Hopefully now you see why temporary price hikes in periods of supply shortage is a GOOD thing, and not some evil strategy for the rich to steal from the poor, or whatever load of malarkey the media is feeding you. Oh, and what about that bailout plan that failed and caused the largest single day drop in the DOW? We'll get on to that later...