Monday, September 29, 2008


Okay, let me get this straight: Large and established financial institutions have been suffering, some going bankrupt because:
  • They have been lending money, too cheaply
  • to risky borrowers
  • for overpriced purchases
  • that they couldn't afford
  • (like houses priced at 10-20 times their annual earnings).
Got that. And... many of these borrowers are now defaulting on those loans. Of course. This really isn't a surprise.

So, the financial institutions are now losing money on those bad loans. Okay, got that.

So, they'll have less money to freely lend, to risky borrowers, for overpriced purchases, that they can't afford. Individuals and businesses will have to pay a higher rate in the future to borrow money, forcing them to be more cautious in considering the necessity of borrowing money for a purchase, and forcing lenders to be more cautious in determining the ability of the borrower to repay the loan. Okay, got that.

So... um, I'm a bit lost as to why this is a crisis. When did we as a nation move away from the principle that we should buy things that we can afford? Housing prices have risen steeply in large part because borrowing was so cheap, leading borrowers to believe that they could afford to pay such high prices, because everyone else was doing it.

Now, how does this affect the proverbial "Main Street" so bantied about? First off, there is the FDIC (Federal Deposit Insurance Corporation) which insures individual deposits up to $100,000 per account for standard checking, savings, money market and CD accounts.*

Then, there is the SIPC (Securities Investor Protection Corporation), which protects individual investor's securities holdings against the failure of financial institutions, with certain limitations.**

So, a bank or brokerage failing will not likely cause you to lose any money directly. Of course, if you own shares in a company that goes bankrupt, well then, you've just lost some money. But then, the issue is diversification of risk. Or, if you were a borrower with an adjustable rate mortgage for an overpriced house, you may still be at risk of losing that asset. Fortunately, politicians have moved in to redress this issue, and are seeking the facility for borrowers and lenders to renegotiate such loans to keep the borrowers in their homes, and maintain the viability of the mortgage to be repaid.

So, the government is stepping in, to prop up the financial institutions (that have been reckless in lending too cheaply to risky investors for overpriced purchases which in many cases they could ill afford and didn't need), so that consumer confidence in these institutions will be preserved (despite the fact that our confidence is shaken because of their own recklessness), and so that they can go on lending money "affordably" so that business (like Boston Market and Starbucks) can borrow for growth and expansion, and keep the economy rolling along.

Somehow, I'm just not convinced that a slowdown is not what is needed (or, in fact, that such an artificial propping up of a failed sector in the economy will actually prevent it). In Wall St. terminology, we'd call it a "correction." And, if we're all in it together, we'll all pull through it just fine. We always do. That's one great thing about America that has not yet been destroyed by eight years of failed policies. We're industrious folk. Let the big, old institutions fall of their own making. Smaller, lither companies will grow from the rubble. New ideas will emerge that will pick up the slack.

It's amazing to me that those most vociferous in their supposed support for "free market" economics seem so quickly to run away from it when their most cherished institutions begin to falter. I say, let them falter. We'll be okay.

*What Is Insured? You are probably familiar with the traditional types of bank accounts - checking, savings, trust, certificates of deposit (CDs), and IRA retirement accounts - that are insured by the FDIC. Banks also may offer what is called a money market deposit account, which earns interest at a rate set by the bank and usually limits the customer to a certain number of transactions within a stated time period. All of these types of accounts generally are insured by the FDIC up to the legal limit of $100,000 and sometimes even more for special kinds of accounts or ownership categories. For more information on deposit insurance see FDIC brochure "Your Insured Deposits."

**Investments protected by SIPC. The cash and securities – such as stocks and bonds – held by a customer at a financially troubled brokerage firm are protected by SIPC. Among the investments that are ineligible for SIPC protection are commodity futures contracts and currency, as well investment contracts (such as limited partnerships) that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.

Thursday, September 11, 2008

Flying High

I'm heading out of town on Monday for my initial meeting with the funding agency that has issued me a contract. I've been working full days of late, keeping track of everything. I won't get paid for another couple months, but I'm definitely on the clock. It feels good. But it leaves me little time for blogging.

I had a conversation this morning for over an hour with a fellow I met a while back at a conference. I wrote a little about him in my old blog. I had contacted him recently to formally ask if he'd serve on the Advisory Board to my firm. It was a great, free flowing and supporting conversation. I'd say there are a lot of similarities between us, though he's a few years ahead of me. He received his PhD in 1991, and founded his own firm in 2002. So, he makes a perfect mentor to me. Even better, our work is complementary, so there should be many fruitful collaborations down the pike.

I just thought I'd poke me head in here to say, I'm still around, and still cranking ahead. I think back to a post I wrote nearly two years ago, about striking out on my own, and the commentary there that pressed me on what that might mean. It's been a good couple years.