Had an interesting back-and-forth with a liberal/progressive/not usual reader about my recent comments on the economy. Highlights below . . .
You mention “faith in illusory wealth” as just one of several points as you opine on why the market is falling. You are speaking very specifically of homeowners and home values, and you don’t make any explicit connection to the markets.
“Illusory wealth” is part of the wealth that is being “destroyed” as the stock markets tank. The people who brought this illusory wealth into existence did not have any “faith” in the value of what they were selling. In other words, they acted in bad faith. They packaged a variety of terrible credit risks into securities, and then these terrible securities were somehow transmuted into AAA-rated solid gold because they were “diversified.”
The ratings agencies were, of course, complicit in this outright fraud. I don’t have a lot of money, or an MBA, but I’m smart enough to tell you that a mountain of “diversified” garbage will never be anything but garbage. The only “faith” these scam artists had was the faith that they could offload this trash and reap the profits before it was too late.
My question to you is: If X% of the wealth being “destroyed” was created fraudulently and never really existed in the first place . . . can we, should we, is it morally right for us to try to “save” this fake wealth? I lament that the crash of this insane bubble is dragging down parts of the real economy with it. And I do think our elected leaders should do what they can to contain the problem. But we can’t hope to preserve what never existed.
A strong point in here, particularly, “we can’t hope to preserve what never existed.” But I would note that some of the perception of the “reality” of the wealth created relates to liquidity. If the guy up the street sells his house for a half-million dollars, I in my similar house might say, ‘Ooh! My house is worth a half-million too!” But the sale price for the house depends entirely on what somebody’s willing to buy for it. My neighbor may have found the last sucker man willing to spend that price for a house in this neighborhood.
Stocks, on the other hand, are (generally) bought and sold in large volumes every weekday. Unless the bottom is really falling out, there’s almost always a buyer for every stock; there may not be a buyer for any given piece of real estate. In fact, with the unoccupied housing volume as high as I linked to yesterday, it may be a long, long time before we have any buyers in a lot of neighborhoods.
You’re right that a lot of people who are howling about lost wealth now underestimated the risk, and their portfolios were never really “worth” what they thought they were. But we also had “faith in illusory wealth” in the dot-com era, too. For better or worse, we didn’t see a massive “let’s bail out the dot-coms” movement back then. (Better for taxpayers, worse for those like me who worked for popular but spectacularly unprofitable dot-com publications.)
For the reasons I laid out yesterday, our government is not setting up an environment where prosperity can be built. In an unstable situation with rapidly shifting rules, nobody’s really sure what criteria to use in evaluating companies and investments. A company might be in dire trouble, or the federal government might be willing to offer it a massive infusion of taxpayer cash. Some are cashing out and holding their money in cash, others gold, etc.
Funny, you write that “The market’s plunge since he took office is not all Obama’s fault, but he’s earned his share.” You don’t do much other than explore the parts that you think ARE Obama’s fault.
True enough. But I am writing a political blog for a politically minded audience. There are plenty of factors beyond the capacity of our government to control – e.g., Saudi oil output, weather, decisions of company leaders, developments in technology, quality of marketing campaigns, etc. But sometimes something that appears initially beyond government control – for example, whether or not foreign countries pursue protectionist policies – can be influenced by our government. If we’re pursuing a protectionist course, it creates a disincentive for anyone else to try to export their products to the U.S. market. Our decision strengthens the hand of foreign protectionists and hurts foreign free-traders.
I’ve got a lead for you on some of the other responsible parties. You say that Jim Cramer has become an “enemy of the state.” He dared to speak out, and now he is pilloried because he once made a bad prediction. You ignore this other juicy Cramer quote shown during Jon Stewart’s tirade: “You should be buying things and accept that they’re over-valued, but accept that they’re going to keep going higher. I know that sounds irresponsible, but that’s how you make the money.” He espouses the EXACT way of thinking that got us into this mess. He has ZERO credibility with me. Maybe some liberals were enamored when he supported Obama earlier. But anyone who’s ever watched a few minutes of his show can tell that he’s not the kind of financial “expert” we should be listening to. He’s the financial equivalent of a ShamWow commercial.
Partial agree, partial disagree. I know a lot of folks who loathe Cramer’s carnival-barker shtick. He says he does the catchphrases and sound effects to bring in people who aren’t natural financial types into this world, to demystify it and make it fun. I find it amusing, but wouldn’t trust my savings with him. Then again, somebody shouldn’t put all of their faith in him, or any other CNBC analyst, or any of Fox’s Bulls and Bears analysts or anybody else; in the end, you’ve got to check things out for yourself and make your own decisions.
(Cramer’s show, as far as I can tell, is full of “buy” and “sell” recommendations every day — which, if you followed all of the advice, would mean taking a hit on every purchase and sale in fees from your broker. Hope the profit covers the cost of doing business . . .)
I’m spotlighting Cramer lately because of the fascinating about-face on another “buy” recommendation of his — Obama.
Off-topic: as far as “Do they really believe that only the rich own stocks? What do they think we have our retirement accounts in, CDs?” . . . Well, you couldn’t come up with a better argument against privatizing social security. I’d prefer that my secure retirement not depend on a market where loudmouth talking heads tell us that knowingly, irresponsibly inflating a massive asset bubble is a the only way to make “the money.”
Actually, now would be a fabulous time to privatize Social Security, because everything’s so low. As somebody wrote recently, an investment in a diverse stock portfolio is the investment most likely to increase in value over a long period of time; unfortunately, no one can guarantee that it will increase in value over any particular period of time. This is why it’s best to get in early and let it compound interest over the course of a lifetime. For all of the risk that a stock portfolio could go down at any given point, it still beats the alternatives of tax hikes and benefit cuts.