Hey I Can't Swim...and neither can Wall Street

I am not a great swimmer, so why is the Fed throwing a life preserver to big companies and not me.

When the market starts flip flopping more than they say John Kerry did a few years ago I usually sit back and think it all through. What is really going on in front of me, did I get it right, and can I really see clearly now because the rain isn't exactly gone. To answer some of these questions here we go:

We have been discussing a Recession for a very very long time now, check out my post from LAST YEAR on this subject, where we weren't afraid to bring up the subject: (http://urbanomics.blogspot.com/2007/10/welcome-to-good-life.html).

Its good to know that most of the economists now finally agrees with us (what took so long?), and this article from last month shows a change in their stance: (http://money.cnn.com/2008/02/05/news/economy/recession/index.htm)

Now lets begin to make our way through the clouds and play out multiple scenarios to see what this all means:

Snapshot of a write-up by Bill Fleckenstein:

"Where will all this stop? Can those who behaved prudently afford to bail out those who behaved imprudently? Why should they have to? And is that what we really want? After all, this country's median income of roughly $49,000 can hardly be expected to service the debt of the median home price of $234,000, up from approximately $160,000 in 2000. Let's do a little math. Forty-nine thousand dollars in yearly income leaves approximately $35,000 in after-tax dollars. Call it $3,000 a month. A 30-year, fixed-rate mortgage would cost approximately $1,500 per month. That leaves only $1,500 a month for a family to pay for everything else! (Of course, in many communities the math is even less tenable.) This is the crux of the problem, and the government cannot fix it."

http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/CateringToTheBailoutNation.aspx

Thanks to Bill's write-up here, we continue to not be afraid of going against the grain. Noticed he used a familiar line that I often use here at Urbanomics and that's "Do the math"...if it don't make dollars it don't make sense!

In my opionion, I am gonna go out on a limb and say that the recession continues for awhile as the Federal Reserve continues to unnecessarily interfere and "bailout" the financial companies...instead of the financial markets. Free capital market thinking says that these companies that took risky investments understood those risks and continued forward with their strategies. I also argue that the Federal Reserve's strategy continues to do very little for 'average person' it aims to protect. I am not calling for a bailout for consumers and homeowners across the country but I am calling for a strategy to achieve balance out of all this mess. That policy would be further assistance for homeowners, increased scrutiny in lending practices and regulatory oversight of the banking institutions that lend and package loans, and finally a policy that focuses on fighting inflation, low economic growth, and a falling valuation in the 'dollar'. And this isn't just the Fed's responsibility, the SEC, FDIC, and government need to step in and do their part.

I fear the current policy gives reassurance to the investors and Wall Street but it simply realigns the financial power on Wall Street (See Bear Stearns), rather than fixing the problems. Again I go back to when Urbanomics called the current environment a true RECESSION, last year. The numbers didn't lie then and thats why we recommended readers to stay away from financials and homebuilders especially after we identified the housing bubble. No one is going to bail out the investors of those mortgage companies so lets not bail out the companies themselves.