U.S. Economy: Not A Rocket Science

It is no longer a secret that, when elected officials get entangled with personal interests and corporate corruption, tax-payers pick up the tab for the damages and the economy shrinks.

American citizens have been hit so many times by the effects of greed and the self-serving attitudes in Congress that a rippling crisis was imminent. I believe we needed a collapse in order to pause and reflect on the price of conspicuous consumption and complacency.

Americans, on the whole, are the world's most prolific consumers. That's because our incomes are higher than anywhere else, and merchants have found highly sophisticated techniques for getting us to spend our money. Unfortunately credit has been abused in three major markets - housing, automobiles and credit cards. The result of rampant consumer spending is the current global financial crisis.

So, what else is new?

If you are a TV channel surfer, you are aware of the focus on the economy from every popular financial talk show. I am amused by some of these forums because they are repetitive and often confrontational. The problem I have with the media, which I have expressed boldly over the past decade, is that the commentators hardly get it right when presenting their views on solutions to our economic dilemma. I am convinced that they are more interested in being photogenic.

That doesn't deter me from espousing on the way our nation's plight is being treated. Economic growth is measured by one thing only: how businesses and consumers spend money, in that order. Layoffs are infectious and they must be stopped.

Strategic capitalization is the answer to that problem. Since banks are in business to finance corporate America, a remedial program must be activated to help restore this basic principle. Apparently, the only source for available capital, at this juncture, is the United States government, in which case, a commission should be set up to safeguard all capital that is earmarked for America's struggling corporations. If anyone ever asked me, I would propose a standardized business plan that would be implemented when companies receive new bank loans.

Corporations and large institutions have been left alone to treat money as if it grew on trees. The sad truth is that these groups will continue their monetary practices until something really bad happens, such as total insolvency and bankruptcy. While these robber barons are enjoying their spoils, the rest of the public has been enthralled in repetitious conundrums about the solution to our national financial crisis. It bothers me, and possible some of you, that so much time is spent on talk and criticism.

I gave our situation a lot of thought. Naturally, I consider myself to be just as reasonable as any of the so-called gurus on television. It has been my view that the solution to the nasty mess we are in is not very complicated. I believe the more we argue about it, the more indiscernible the solution will become.

Looking at a problem from the bottom upward is most often an efficient way to solve a problem. In my opinion, the economy would begin to grow again if consumers had job security and money to spend. Ok. If small businesses had sufficient cash flow they would not have to layoff employees. Instead, they might even be able to increase their human resources. If that were true, banks should be able to provide business loans to businesses to make all this happen. There are no arguments to refute these principles.

So, how does the grand scheme of finance come to life? The answer to this question is not so simple, but it's also not a rocket science. Given, there extenuating circumstances involved with stimulating the economy, an extremely well planned, simplified funding program (no, it's not TARP!) should be designed to provide liquidity in the credit markets. It would be systematic, measurable and accounted for by the Federal Reserve Board. The FOMC meetings would include a thorough monitoring and evaluation of the funding program periodically, as needed.

The Fed has the money. Why don't we bypass as much governmental posturing as possible, commit to a $500 billion guarantee to commercial banks and get on with it? The GDP could grow by 10% in the second half of 2009 if consumer spending increased by 15-20%. Yes, I am aware that I'm too late and missed the congressional invitation that was sent to the wrong address. I believe springs eternal.

God bless America. Cheers to President Obama!

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Mortgage Bonds and The Importance of Class

Class in this discussion refers to both the asset and the market makers.

In 1988, I received my first orientation to Government National Mortgage Association(Ginnie Mae) and Federal National Mortgage Association (Fannie Mae). Emphasis was placed on the safety of investments issued by these agencies. I understood the distinction between the two institutions, meaning, GNMA was an agency of the U.S. Government and FNMA was sanctioned by the government and nothing more.

Several weeks of training followed, allowing me the time to understand the importance of a new era in the bond market. Mortage-backed securities, referred to as MBSs, were designed to provide 50 to 100 basis points more than U.S. Treasuries with similar maturities while enjoying the status of a AAA rating. These investments made a lot of sense when they were first introduced to the market. Investing in a security tied to the ownership of a single-family dwelling was probably one of the best ideas since the IRA was introduced in the '70s.

Soon after I learned how the mortgage market worked, the Colleralized Mortgage Obligation (CMO) was born. This concept became the answer to the wide-spread dissatisfaction over the return of principal from standard mortgage bonds. Investors preferred to have their principal earning interest for as long as possible during the life of the bond. No problem.

I joined the charge in touting the superior performance of CMOs, including the liquidity of the iinvestment. My clients learned enough about this opportunity to earn from 7% to 8% on their money during the unforgettable period between 1991 and 1998 without losing one dime of principal! How could they lose in an environment of falling interest rates? It was a wellspring of capital appreciation.

Deja Vu All Over Again!

It is mind boggling to think both Congress and Wall Street have each contributed to a dilemma that would destroy our economy. There was never a way to avoid a financial crisis if curbs were not placed on the kinds of mortgages that could be underwritten and sold to the bond market. Similar to the infamous junk bond market that reaked havoc in the late 1980's, the mortgage industry which presented a golden opportunity to investors during for almost two decades only to take back its rewards in a devastating scenario.

One can become enraged when studying the reasons this crisis has occurred. Greed, among other things allowed a few individuals, both in politics and in business, to capitalize on the rise and fall of the mortgage bond market. I won't spend the energy to cite cases and individuals here, but reader can certainly learn from recent reports on the character of the financial world.

Two respected sources of detailed information about our economic status are Bloomberg and Forbes. Rather than take the easy route and accept the confusion from so-called economic pundits on television, you might want to search for the answers to your personal financial security, independently. After all, you are probably just as smart as anyone you see in a pin-striped suit.

God bless us all!

Hudster

Rich Alan, Poor Alan

At about the time my story, "Stock Power (The Novel)" became more than a notion, I detected the unsettling coincidence of market movement with public discourses from Alan Greenspan. This would be in 1996, just prior to his "irrational exuberance" speech, to be more precise. It wasn't long before a sparse number of erudite financial journalists aired similar viewpoints.

Now, that Mr. Greenspan is no longer the country's official economic "catalyst", you would expect that he could slither around the world making his high priced speeches to private audiences without much notoriety. Not so.

Once again, enough of the right (or wrong) people have succeeded in pinning Wall Street's latest jitters on Greenspan's recently published views on the future of the credit markets. That's incredible! Let's see if I have this straight...

We're in the woods taking a group picture of the wife and kids with our super-duper digital camera we purchased a week before we went on vacation, and there's a grizzly lurking in the background (i.e., 0% financing, free blackberries and bad credit re-fies). Would we really need Alan Greenspan to come along and say, "Perhaps you might want to crop that grizzly over there out of the picture, Mr. Consumer." Better still, would it be Mr. Greenspan's fault that the bear presented an inconvenience, in the first place?

I always considered it essential, as stockbroker and investment counselor, to ask investors if they thought sequential refinancing was a sound economic strategy. Nearly everyone with whom I could hold a conversation on the subject concurred that the federal government had over extended its credit worthiness - and that was in the mid-nineties! What's bad for the gander is doubly bad for the geese, in this writer's opinion.

I have not studied economics formally; but there was never any doubt in my mind that falling interest rates were a definite indication that we were headed for a credit crunch. It's a good bet that conditions that existed in the late '70s will never be repeated; and I expect [federal funds] rates will move in ranges below 6% for many years to come. That kind of forecast portends a flat economy and a much riskier investment environment for people looking to retire rich.

Obviously, the markets will vibrate to the tune called the "Greenspan Effect" a while longer. I wouldn't be surprised if his motivation for making speeches is not entirely money driven. In which case, it might not be a bad idea to stay tuned to what he has to say.

Hudster