Watching the events of the last two weeks, one is temped to think that is the case, but I know the common sense of the people of this country is better than that. But our public education system does not teach economics and without the basic understanding of markets, and blinded by technical jargon repeated by news commentators who have no idea what they are talking about, the people are not applying that common sense to what has transpired.
So, I’m going to try to bring some clarity to the recent economic news.
Your $200,000 house was never worth $400,000 In an effort to create a false appearance of prosperity, the Clinton administration seized on the Carter era Community Reinvestment Act and expanded the Government Sponsored Enterprises, Fannie Mae and Freddie Mac, to inject approximately $2 Trillion of imaginary money into the housing market. SEC regulations were changed to allow bundling sub-prime mortgages into securities which could be sold like stocks. If you want to rehash the details of how it was done watch “Burning Down the House” which though partisan, is an accurate retelling of what happened. Use the PAUSE button a lot to stop it to read the information. I’m not going to retell that sad tale again.
But the result of throwing $2 Trillion into the housing market far faster than supply could catch up was an entirely predictable inflation in the price of houses. For most Americans, the equity in their home is their greatest store of wealth, and the near doubling of home prices in a decade had the appearance of a great increase in wealth. In reality, the houses did not get any bigger, their real worth was unchanged, only the price went up. But people took advantage of the increased price of homes to cash out either by selling at the inflated price or refinancing to make other investments or buy luxuries they could not afford. Builders flooded the market with new construction to cash in on the bonanza.
The problem though was that the new “equity” in those homes did not really exist. Like the Emperor’s New Clothes, it only existed so long as people believed, or pretended to believe, it was real. As soon as it was brought into question, the price bubble burst and houses are falling back to their true values as we watch. Unfortunately, many people bought, or refinanced, into that bubble, and now owe more than their home could now be sold for. So long as they make the payments, that should not be a problem for anyone except the guy who paid too much for the house, but because of the ‘Mark to Market’ accounting rules put in place by the Sarbanes-Oxley Act in response to the Enron scandal, those bundled securities sold in the stock market, mostly to financial institutions, suddenly were subject to huge markdowns, making many of the holders insolvent. Led by the financial sector, the stock market plunged.
However, except for those stocks in financial institutions holding too many of these sub-prime securities, the fall in the value of other stocks is no more real than the increase in the value of your home was.
That’s right, your investments are safe unless they are too heavily concentrated in financial instruments. Except for those highly leveraged sub-prime securities which had no more real value than the Emperor’s clothes, stocks are shares of companies that make things or provide services that people need or want. They will be doing so tomorrow, just as they did yesterday. Their factories did not burn down, the machines did not rust away, and the skills of their employees were not forgotten. Those are the assets of which you own a share.
The Stock Market is not the economy it is just the price tag on the economy, and that can be influenced by irrational mood swings and illusions just like the housing bubble. The real, underlying value of those stocks is still there, but right now the retarded lemmings who don’t know the difference between value and price are running away from the stock market in panic. If the government will just get its big hairy thumb off the scales and stop trying to alter the outcome for political advantage, the market will find its balance in due time and business will return to normal.
The real danger is that if the public as a whole forgets its common sense and elects socialists to Congress and the Presidency in the belief they can fix what really isn’t broken, they really will lead us all over a cliff.