Thursday, August 11, 2011

Stuff I Actually DO Know

There are a thousand things about the global financial crisis now occurring about which I am completely in the dark. The level of interconnected complexities inherent in this system is beyond my pay grade. However, there are several things about this mess that I know, without a doubt to be certifiably true. The first step in understanding the complex is to clearly state what is known. So, in the spirit of discovery, and for personal therapeutic reasons, I offer the following certainties:

1. American banks, large and small, have on their balance sheets millions of underwater mortgages. These were ill-advised loans made to unqualified borrowers with insufficient equity stakes in property which has dropped precipitously in value. Now the banks “own” homes that are worth far less than what the bank is owed. There are many villains in this stupid tale, banker greed, home-owner vanity, government malfeasance etc.. but at this point it doesn’t matter. The problem is primarily this, how does the bank put a value on this huge section of their balance sheet? Exactly how much is all of that real estate worth..today? They don’t know. How long will it take for real estate prices to recover so as to remove this albatross from their future profitability? Nobody knows. If nobody knows the answers to these vexing questions, then how can a reasonable investor make an informed decision about the health and safety of banks? This explains everything I need to know about why banks are so reluctant to lend money these days.

2. American banks and huge brokerage firms like Goldman-Sachs have always loved buying the stock of other banks and brokerage firms, especially those in Europe. Even better, they love buying the sovereign debts of those countries. So, if Greece or Italy, Spain, Portugal, or even France were to default, then that would mean that American banks would hold even MORE worthless stuff than they do now! Who knows, maybe their holdings of sovereign debt would be so awful, it would make everyone stop worrying about all the worthless real estate they own!

3. America is filled with men and women who don’t participate in recessions. These hardy business owners are so busy producing goods and services at a fair value, they don’t have time to watch CNBC and listen to all the experts tell us how terrible things are. They spend most of their spare time trying to figure ways to get better. It’s these people who keep this country afloat and I thank God every day for each and every one of them. But these men and women, who pay this country’s’ bills are not indestructible. They have been taxed, regulated, impugned and harassed to within an inch of their lives over the past twenty years or so, and my biggest fear is that one day they are going to tell the rest of us to take a hike. One day the entrepreneurial class in America just might say…”Let me up, I’ve had enough”. If that day ever comes, we are screwed.