Financial services regulation is a mess! And a lot of businesses would like to keep it that way! Banking institutions have from 3 to 5 regulators, insurance companies are regulated by individual states, the SEC has been ineffective in monitoring "over-the-counter" transactions that are not defined as securities. And all those "cracks" offer profit-making opportunity. But they also create unmonitored and unmeasured risks!
I've often said: "The only thing worse than a financial problem is the government deciding it has the solution!" But . . .
. . . in this case, I think it's time for some measured action to re-organize financial industry regulations.
The last time we did this was after the Crash of 1929, and in the midst of the Great Depression, when we created the Securities and Exchange Commission (yes the "and" is an integral part of the name), along with other rules designed to separate commercial banking (loans and deposits) from investment banking (securities and capital formation). Well, in the last 15 those walls came down, through piecemeal legislation.
Now, no one agency can maintain effective regulation or even information gathering -- without stepping on another agency's territory. Bureaucratic rivalries and political gamesmanship have left our financial system in a vulnerable state. If the Fed has to stand behind the entire system to avoid a crash -- then there must be some oversight.
Note: My comments are my own, and I may have some conflict because I serve on the Board of CME Group (Chicago Mercantile Exchange and Chicago Board of Trade) which are regulated by the CFTC, and have a great interest in how regulation sorts itself out.
So the key to fashioning a sensible, comprehensive, and a-political regulatory system will be a willingness to see what really works in a competitive global financial marketplace. On that score, I'm always hopeful and mostly disappointed at government solutions.
If you'd like me to answer your personal finance question, please send it along. I'll delete your email address, and use only your first name. Only questions of general interest, please. I cannot give individual stock recommendations!
I received the best press release of the year from Edmunds.com -- a comparison between the cost of kids, and the cost of keeping a car!
Their press release comes as the government releases a report showing it costs an average of $11,337 per year to raise a child for 18 years. What do popular cars cost per year? You might be surprised at . . .
these numbers from the Edmunds.com press release!
Do you think it’s more expensive to raise a child or own a car? Well, it depends on the car!
A quick look at the Edmunds.com True Cost to Own tool at http://www.edmunds.com/apps/cto/CTOintroController indicates that it costs about:
· $7,182 per year to own a 2008 Toyota Camry for five years (see http://www.edmunds.com/new/2008/toyota/camry/100900018/cto.html?setzip=19081&vdp=off for details)
· $10,108 per year to own a 2008 Ford F-150 for five years (see http://www.edmunds.com/new/2008/ford/f150/100903333/cto.html?setzip=19081&vdp=off)
· $14,176 per year to own a 2008 Mercedes E-Class for five years (see http://www.edmunds.com/new/2008/mercedesbenz/eclass/100931589/cto.html?setzip=19081&vdp=off for details)
· See http://www.edmunds.com/apps/cto/CTOintroController or call on us for more automotive examples…
(Edmunds.com True Cost to Own takes into account average depreciation, financing, insurance, fuel, maintenance, repairs, taxes and fees…not entirely dissimilar from the expenses associated with raising a child!)
Again, here's the link to find out the cost of your car: http://www.edmunds.com/apps/cto/CTOintroController
Sorry, I no link to what it costs to raise a child -- but I think the govt stats are way low! What do you think???
As you can read in my column of Monday, March 24th, there is a strong conviction on the part of many experts that, in spite of all the liquidity the Fed is creating, there is still a great possibility of DEflation. What IS deflation? Something that few Americans have lived through -- a decline in the value of assets. That kind of decline makes the burden of debt even greater. And it creates an economic slowdown that challenges our ability to grow our way out of our troubles.
The best example is Japan. Their real estate bubble burst in 1990, and has not yet come anywhere near its previous levels. Their stock market is measured by the Nikkei 225, currently trading at 12,500. That's far below its peak at 40,000 in 1990. So the question is a very real one: Can the Fed do a balancing act between creating liquidity to prevent deflation -- or sparking inflation down the road? What do you think?
Bear Stears WAS a bailout -- not for Shareholders, for the System!
The Fed has put their money where their mouth is! They've been saying they wouldn't let the financial system fail, even if they had to reduce interest rates and flood the system with liquidity.
That's what they did over the weekend, and will continue to do tomorrow.
Media commentators are calling it a "bailout." It was, sort of. But not a bailout for Bear Stearns. Their employees and shareholders took a huge bath, equity wiped out. Most were required to take some compensation and all bonuses in stock. They used their "wealth" to buy expensive houses in Manhattan and Westchester. Now the mortgage mess will come home to them! What's the monthly payment on a $6 million mortgage?!
But make no mistake. This wasn't a bailout for Bear -- those it definitely WAS a bailout for the system!
I was surprised by the questions I received today -- people wondering if their money in the bank was "safe." Few recognize the difference between "investment banks" and "commercial banks" -- the ones that take your money in insured deposits.
Of course, it's tough to tell the difference these days. The split between the two banking entities that came after the 1929 stock market crash was gradually removed. In fact, JP Morgan, Chase - the company that "rescued" the assets of Bear Stearns is, itself, a combination of commercial and investment bank. By the way, don't worry about the problems spreading to J.P. Morgan Chase. Canny Jamie Dimon carried out the rescue -- but with $30 billion in guarantees from the Fed, just in case he has to write down more of those mortgage assets.
Your money is safe in the bank. The commercial, FDIC insured deposits in the bank. And now the Fed has made sure that all those corporate deals and financings that were done by investment banks are secure, as well.
So, no problem? Not for the next few minutes. Not until the Treasury tries to refinance its $9 trillion dollar debt. Then they'll learn that the rest of the world doesn't want dollar investment that pay very low rates. And they don't want dollars that will be devalued by the Fed's continued liquidity creation!
THEN, we'll see what the Argentinians, and Brazilians, and Mexicans learned when their currencies declined in value because of inflation! Can't happen here? Just take a look at gold, oil, commodities. The world would rather have them, than dollars. But that's a subject for the next blog -- T$
Interesting discussion setting up on this blog --
a) Forget a bailout -- these people, and financial institutions, got themselves in trouble because of their own greed, so don't bail them out, let the free markets work it out, and
b) This mortgage mess threatens our entire financial system and economy, so the government MUST do something!
I must say . . .
I can see both sides of this!
I've often said that the only thing worse than having a huge financial problem, is the government deciding IT has the solution! (I said that back in the S&L crisis in the early 90s.) Yes, the free markets would bring housing prices down to the levels they "should" be -- dictated by the market. And people who lose all their equity would simple be foreclosed, have to find rentals (now that their credit is ruined) which would push rental prices up. And those who saved and planned, could buy homes at "bargain" prices.
And peoplewho are scrimping and paying and making the effort to pay their mortgages on time will be justly rewarded, as eventually home prices will rebound. Why reward people who overpaid, over committed, and now must pay the consequences?
On the other hand . . . this is truly ruining neighborhoods (banks don't mow the lawn or shovel show on repossessed houses). And now the financial system itself is taking a hit (see Bear Stearns).
So what's the right thing to do -- bailout or not? And if so, should we "bail out" the homeowners through some kind of revision of their mortgage documents to lower the principal amount owed and the rate? Or is it more important to "bail out" the financial system -- ie the Fed's $200 B "liquidity pool"?
And can we "afford" any bailout? And can we afford NOT to do a "bailoout"?
The stock market was overjoyed -- the Fed is making an extra $200B available to banks and financial institutiosn, hoping that liquidity will make them more likely to invest in mortgage backed securities. The idea is that with more investors for the paper, the institutions will be more likely to make mortgages in the first place, and at lower rates.
BUT . . . what about homeowners who are facing foreclosure? It will take months for this new liquidity package to float through the economy. And during those months, the foreclosures will continue to mount! And the headlines will continue to remind other consumers that the economy is in precarious shape. That worry destroys confidence, and consumer spending!
The stock market liked the move, for sure! But stocks don't question why the liquidity is there to buy stocks; stocks just move higher because buyers are willing to be aggressive, pushing prices higher. In fact, for a time stocks should definitely benefit from the liquidity that creates inflation -- because while the value of the dollar declines in inflationary times, stock prices can rise -- thus becoming a hedge against inflation.
But just look at interest rates, gold, and oil!
Mortgage rates on 30 year fixed rate mortgages have risen from 5.5% in January to 6.03% last week -- because the banks weren't lending. Now banks will start lending again. But mortgage rates are set by long term Treasury rates, which are set at auction. And there will be a lot of worry about committing to buying long-term treasuries in the face of potential inflation.
The old mantra of the successful investor has always been: "Don't Fight the Fed!"
Now the Fed is doing everything possible to drive interest rates down and flood the market with liquidity. They'll likely cut short term rates at least 50 basis points, or more, next week.
But the U.S. is deeply in debt -- $9 TRILLION -- which we need to borrow to keep our government afloat. Who in the world will lend us that kind of money, at lower interest rates, in the face of massive Fed intervention to create "liquidity" (inflation)?
The gold market, and oil -- which is priced in dollars -- are telling you the world isn't so happy about the Fed's actions, even though the U.S. Stock market rallied.
And worried homeowners, who find themselves without equity to refinance as home prices drop, might not own those homes long enough to benefit from the inflation that will ultimately push prices of assets higher. That's the Savage Truth!
Hi, and welcome to the very first entry in my new blog! My goal is to stimulate some discussion about what's going on in the markets, and about government policies that will impact all of us.
Let me start by posting the last few paragraphs of my column today. It has already brought some emails, and I've asked those people for permission to post some of their comments.
In the future, please go directly to my blog and I'll be interested in hearing your thoughts. With travel schedules permitting, I promise to be there at least a couple of times a day! Many thanks -- Terry
Here is the last part of my column, talking about a potential "solution" to the mortgage mess!
Fed Chairman Ben Bernanke acknowledged that even dramatic Fed interest rate cuts and a huge tax rebate program are not getting the economy back on track. The Fed is worried about the banks and is providing more credit. But the banks are worried about lending. And the world is worried about the value of the American dollar amidst our growing national debt.
Even staunch "free-market-solution" advocates are coming to recognize that the cost to our society of these foreclosures and bankruptcies could be worse than the cost of some sort of government-backed rescue plan.
Alex Pollock of the conservative American Enterprise Institute has come up with a plan reflected in a bill introduced by Sen. Chris Dodd (D-Conn.). It recommends a modern version of the Depression-era Home Owners' Loan Corp., which was created in 1933 to help avert foreclosures by purchasing defaulted mortgages from the banks and then making new, more affordable loans to the homeowners based on reduced property values.
At that time, nearly half of mortgage debt in America was in default! Drastic action was necessary. Eventually, nearly one of every five mortgages in America became owned by HOLC. Lenders didn't get all their money back, and they had to settle for lower-yielding government bonds. But the program did work to stop the downward spiral of home foreclosures and values.
So far, there's something in this current "bailout" proposal to offend everyone -- homeowners, investors and even foreign central banks -- since each stands to lose something in the process. But there is also general agreement that someone needs to stand up and lead the way out of this mess -- before it inevitably gets even worse. And that's the Savage Truth!
