18. October 2008 by admin.

It’s been another week where one needs a barf bag to follow the stock market.  Perhaps the market is beginning to stabilize, and the reality may be sinking in that the party is over, and we’ll have to go back to earning a living.  I hope so, anyway.

The rightist New York Post blames the economic crisis of the past weeks on Democratic politicians who encoursged banks to make mortgage loans to people who couldn’t afford them.  Both of the Presidential candidates lay the blame with greedy Wall Streeters who profitied from financial instruments that they didn’t really understand.

And both of those are true.  Those who say that Wall Street should be hoisted on its own petard, instead of being bailed out by the government, conveniently ignore that the government does not have clean hands in this matter.  Part of what genuinely worries me about this issue is that since everyone (politicians who encouraged bad lending, irresponsible borrowers, the banks that lent the money, and the Wall Streeters who believed that they could engineer the risk out of the whole affair) got us into this mess through their bad judgement, who will have the smarts to get us out of it?

But underneath it all, with 20/20 hindsight, it seems that everyone forgot a basic rule of economics: that the value of something, over the long term, determines its price, and not the other way around.  When the price of something becomes separated from its value, bad things happen.  It led to the Dutch tulip panic of years ago, to the stock market crash of the 1920s, and to the current economoc crisis.

Yes, the politicians encouraged banks to make loans to questionable borrowers in the 1990s, in the name of civil rights.  But if that was all that had happened, it would not have resulted in the situation before us.

But these loans were available to everyone, and many people took advantage of them, driving up the price of real estate.  It’s a funny thing: when the price of a loaf of bread or a gallon of gasoline shoots up, people get upset, but when the price of houses goes up, everyone’s happier because they think they’re getting richer.

Meanwhile, the underlying value of the property hadn’t really changed: the houses didn’t grow new bedrooms.  They were the same buildings, still where they were before, in neighborhoods that hadn’t really changed.   But somehow everyone believed that the rising prices reflected rising values, and that wealth was therefore being fabricated out of thin air.

Ultimately, even bankers and businessmen with normally good judgement bought into the charade, putting up new real estate developments into an overextended market.

And then the music stopped, and prices moved back into alignment with the underlying values.  Beyond the irresponsible borrowers who couldn’t pay their mortgages, even more responsible people might simply walk away from a house with a $500,000 mortgage if the property is only worth $300,000.

And now we have to pick up the pieces….

Posted in Dysfunctional Government, Things Falling Apart, Money | No Comments »

13. October 2008 by admin.

Once upon a time, I was a manager in a rather large organization.  From time to time, things would go wrong, but somehow, it seemed impolite to suggest that someone or some department was responsible for what had happened.

“Blame is not a useful management concept,” I used to say.  I was trying to be facetious, but it surprised me how often people believed me.

The thought came back to me in recent weeks as I’ve watched the saga of the financial meltdown on the tube.  Although, informally, the editorial pages and the Presidential candidates have blamed greedy community activists and greedy Wall Streeters, there has been no official effort, as far as I can tell, to assess who or what was responsible for the financial crisis.

And after a week of downward lurches, the stock market shot up over 900 points today.  So I guess everything’s rosy again, and we can go back to being fat, dumb, and happy.

And we still won’t properly understand how we got into this mess.

And we still won’t properly understand how to avoid it in the future.

Posted in Dysfunctional Government | No Comments »

12. October 2008 by admin.

The news for the last few weeks has been a relentless saga of the economy and how we’re supposed to be in terrible trouble.  Congress passed, and the President signed, a plan to provide $700 billion to help ‘unfreeze’ credit markets.  Ever since that happened, the stock market has gone down every day.

For my part, things seem unchanged.  Some time ago, in an idle moment, I made a loan application at the bank: they denied it, saying that they could not lend to the company with its present management.  (I’m surprised they didn’t say something unsavory about my mother!)  Since then, I’ve financed my business out of the till.  Meanwhile, at least twice a week, I receive an application for a ‘pre-approved’ credit card.

Yesterday, my wife and I went to Governor’s Island, a place shrouded in mystery: it was once an Army base, and then a Coast Guard base, and was off-limits to the public.  Even now, the island is only accessible during spring and summer weekends.  We visited in 2006, and looked inside many of the historic buildings.  Our visit on Saturday was motivated by an art exhibition.

But first, we wanted to explore a little.  We started walking, but then discovered a plase that rented four-wheeled pedal vehicles.  It was fun: it hit my bicycle spot, but my wife (who never learned to ride) could share the experience with me.  We rode around the island, mostly staying close to the water, looking out at New York Harbor on a gloriously clear day.

“Tiring, wasn’t it?” the rental guy asked me when I returned it.

No, it  was invigorating.

The actual art exhibit was a disappointment: everything that gives modern art a bad name.  Still, it was nice to set aside all of the troubles of the world, and the economy, and the upcoming Presidential elections, to share a pleasant sunny Saturday with my wife.

Today was another Sunday workday, and I rode my bicycle to work in the office.  The weather was nice, if a little warm for mid-October, and the endorphins were flowing.

Posted in Life Goes On | No Comments »