Alright, I have been very busy in the last few weeks and I can't believe that I haven't had an opportunity to write about what has been going on lately. It took a good friend to send me his write-up about what has been going on for me to get myself in gear and update you on what is up with the country, economy, and your portfolio. I had written a post on what the Bailout of 700 Billion dollars means to me as an investor and now I would like to trade hats and tell you what this means to me (and you) as consumers.
The first theme I would like to address is, if I could see the downturn of the housing market in February 2006 (http://urbanomics.blogspot.com/2006/02/huff-puff-blow-houses-down.html), why didn't the government see this coming. And if I could see the developments of a recession coming (http://urbanomics.blogspot.com/2007/10/welcome-to-good-life.html), why didn't the government acknowledge the recipe for a recession. This is what I wrote in the second post:
I am no mathematician but poor financial markets + bad consumer debt + rising foreclosures + declining property values + layoffs = something is wrong (possibly RECESSION). I am not comfortable with the volatility in the market because as companies are beating earnings or being upgraded they go up and then immediately the market brings them right back down due to all the negative news.
This theme is raised because in October 2007 I saw poor fundamentals developing and I believe the government had the opportunity to see these fundamentals and take action - mainly against housing and foreclosures! Limited action was taken against this crisis and no bailout plans were developed, so as a consumer this $700 Billion dollar plan is slightly one sided and leaning to aid the financial institutions as opposed to Main Street.
The next theme is who came up with the price tag! I am talking about this $700 Billion dollar amount and why do taxpayers have to foot the bill. This amount is a huge sum that may not be enough. Let's look at how much money has already been injected in the financial markets: $200 Billion for Fannie and Freddie, $85 Billion for AIG, billion dollar backstops for other firms and finally billions being injected into the financial markets to increase liquidity frequently. Once you total the sum, it easy tops a Trillion and this bill is ultimately footed by taxpayers! Not a good equation.
So if you are a regular person on Main Street you quickly recognize that this bill is focused on Wall Street and doesn't address all of the problems that the everyday person is experiencing and has been experiencing for a very long time. I would have preferred a bill targeted at both helping people (subprime, adjustable rate mortgages, high gas prices, declining jobs) and Wall Street (liquidity and toxic assets) equally!
So what are solutions other than a $700 Billion Bailout:
- Well how about the proposal posted by MKinya below, it advocates the government buying these assets and possibly selling the assets to Main Street investors. (JGOTTI RESPONSE: This could be a possibility, however I wouldn't see why investors/taxpayers would want to buy these assets when the government just bought them with their own money. In addition, these assets are so complex that if Wall Street can't understand and price them, then I would be hesitant to buy them, because I am not a well informed investor...and if there were well informed investors (or some argue there are) they would have stepped in and bought these assets already...instead of the government having too)
- How about a package that takes care of consumers. We could inject money into consumers who would use the funds to buy goods, pay bills, invest, save or pay on their mortgages. All these things help spur the economy and add to the liquidity for financial firms.
- How about a package that assists people distressed with the possiblity of foreclosures and adjustable rate mortgages combined with the possibility for the government could buy foreclosed property. A measure like this would stabilize the declining rate of foreclosures, keep people paying fixed amounts they can afford, stabilize home prices for people across America, and spur growth for investors on the sidelines who are now willing to buy in a stabilized housing market.
- How about having the Treasury/Federal Reserve stop or limit the endless pumping of money into these major banks to jumpstart liquidity. Major banks are not lending directly to each other and definitely not lending to consumers so a different practice may be needed and that could be to have the government become a direct lender (buypassing these huge banks) and funding liquidity into regional and small banks that will jumpstart liquidity and ensure that consumers are getting the loans they need.
- How about allowing the Market freely resolve its own issues. Some argue that this is needed as a cleansing or purging if you wish of what has taken place. The excesses or greed on both Main Street and Wall Street need to be brought back down to normal. Further, we might be seeing that as deals continue to get done to acquire banks that have been severely affected such as Washington Mutual and Wachovia. Deals got done at discounted prices to buy the assets of these firms. Even Lehman Brothers and AIG assets are quickly being swallowed up by the markets. What this tells me is that there is capital for deals to get done however the value of some of these firms where in excess and now that the purging is taking place they are being acquired at current market values (taking into consideration the toxic debt they hold). And possibly the same is happening on Main Street as housing prices continue to fall...and they will fall until investors on the sideline have determined that those (toxic) inflated prices have been reduced to what the market truly values them at.
Ultimately I truly believe that all of these measures need to be incorporated into a package to address all of the true issues that are out there. We need a package that helps consumers, distressed mortgage owners, major banks, small regional banks, investors, and the government and the best path is to take the best from all of these points and addressing the issues from all angles.
Thanks
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