Wall Street Meltdown: What The Government Should Do Next

After another brutal day on Wall Street, the question will surely be raised as to what the U.S. government should do next to try to stop the bleeding and the meltdown that is occurring day after day.
I think I have the answer. Are you ready for it? Here it is:
Absolutely nothing.
That’s right. Nothing. No more interest rate cuts. No more providing additional loans or credit to banks. No more bailing out insurance companies. No more promising to buy risky debt. Nothing. Zip. Nada. Zilch.
Why?
Because nothing they have done so far has worked. The government has tried tactic after tactic to try to calm the markets, but it isn’t working.
These investors that are hitting the panic button have it in their heads that they need to drive the market down day after day. No rate cut, bailout, insurance company rescue, or anything else seems to stop them from panicking. They’ve made that clear.
So, I say let’s just stop trying.
My opinion is that these ‘traders’ who are choosing to let hundreds of billions of dollars disappear from our economy every day are the equivalent of crying babies.
When a baby cries, you can do many things to try to make it stop crying. You can feed it. You can change its diaper. You can rock it. You can give it a pacifier or a rattle. Most times, these things or others will make the baby settle down and stop crying. But, not always. Sometimes a baby is just going to cry no matter what. In those cases, you have to make the decision at some point to just let the baby cry itself out until it’s done.
Basically, these traders driving the market down are the babies of our economy right now. The government has fed these babies (bailout), changed their poopy diapers (interest rate cut), given them their rattles (extended additional credit), and everything else that you provide to a crying baby.
But, these babies have made it clear that they just need their time right now to cry. And cry they will.
So, I say let them cry. Let these sellers bawl their little eyes out. Let them sell and think that they’re accomplishing something. Let them wail at the top of their lungs until they can’t wail anymore. Eventually, just like a baby, these sellers will tire themselves out. And they’ll quit crying.
Then, and only then, the government can get back involved. At that point, maybe the investors will appreciate the steps being taken to try to calm the waters. But for now, there’s no appreciation.
Only the sound of babies crying.

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Net Worth Review: October 2008

Well, it was a brutal month if you look at the bottom line for net worth. We witnessed the largest percentage drop since I’ve ever seen since I started tracking.
Let’s start off with the bad:

  • Where to I start? Well, anything with investments was brutalized. Our retirement funds went down in double digits, as did all of our other non-retirement investment holdings
  • Our bottom line net worth was reduced down to levels not seen since 2004. I guess that sort of goes in line with the stock market since I think we’re around lows not seen since around that same time.

The positives:

  • We continued to make good progress on our debt. We paid of 0.39% of our total debt, which is good. It wasn’t as good as last month (which was over half a percent) but it still beat what was normal for us in the first half the year, which was around 0.39% 0.25% (corrected). Our debt consists solely of our mortgage and my wife’s student loans.
  • We began the move of some of our cash savings from a non-FDIC insured account to an FDIC insured account. Even though the return is lower, I think the peace of mind we get makes it worth it. As I outlined in an earlier post, we will most likely create a CD ladder in our ING Direct account to improve our return.
  • Our home value decreased only slightly. Normally this would be a negative, but according to Zillow and CyberHomes, the value only decreased by a few hundred dollars. With the way the value has been shedding off lately, this is actually the ‘best’ month we’ve had in quite a while. I guess you have to look for the silver lining in all clouds.
  • We continue to have no credit card debt, as we pay everything off every month.
  • I have $187 to allocate after winning my Fantasy Baseball league this year. I unseated the previous champion who had won for five straight years, so that was an accomplishment. I will probably dedicate a future post to what I might do with this, but for now it’s sitting in the bank.

All in all, a bad month if you look at the bottom line. But, since I made a conscious decision a few months ago to gauge our progress more on how we pay off debt, I feel we did as good as we could.

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My Former Residence Is On The Market….Sort Of

I found out that the condo that I used to own is up for lease. I purchased a condo at the age of 24, and lived there for over eight years before selling it last year so that my wife and I could move into our wonderful home. It was a great place, and held a lot of wonderful memories and fun times, and became a hangout for many of my friends and I. But as I was giving up bachelor life, I also decided it was time to give up the bachelor pad.
I found out by pure accident over the weekend that it is up for lease. I missed a call on my cell phone, and when I checked the message, there was somebody inquiring about the ‘condo for rent’. I would have thought it a wrong number, but they asked, by name, for the new owner that purchased the condo from me. I recognized her name from the closing and some brief conversations that we had afterwards about the condo.
After hearing the message, I immediately entered my old address into Google, and found that it is indeed listed through a real estate agent for rent. I figure that the call may have come from someone else in the condo complex. They might have seen the sign from the realtor, but decided to try to go direct to the owner, perhaps to get a better deal. I’m guessing that the lady that bought the condo didn’t give the association her updated phone number, so although they have her name, they still kept my number.
Seeing the condo for rent made me hope that everything is OK, and that there’s no financial trouble for the new owner. She was a single lady with a college-age son, and it was her first time owning. I know that she ended up financing almost all of it, and probably got one of the very last ‘virtually no money down’ deals out there, as the whispers of big problems in the real estate market started not more than a month after we closed.
I also know that since she didn’t put a lot down that she’s probably underwater (owes more than it’s currently worth) because even though I sold it on the downswing, the market has still gone down over the past year. Still, she was very excited, had a good job, and seemed very responsible, and seemed to be in it for the long haul regardless. I hope that everything is OK and that there’s a good reason that she’s got the condo for lease, and not because it’s no longer affordable. After I told my wife, she told me the next day that she’d dreamt that the lady had found a significant other and no longer needed the condo as she was moving in with her new beau. I hope that it’s good news like that!
I wish her and her son the best, and also hope the best for the great place that I called home for quite a few years.

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One Lenders Take On The Bailout Proposal

A very good friend of mine is a commercial loan officer for a bank, so it was interesting to see his take on the bailout proposal. The bank he works for is not one of the ‘high risk’ banks that is in trouble because of the many bad loans. They kept with a conservative and safe loan structure, even as other banks were loosening credit and getting into trouble.
But, as my friend pointed out, even their bank is getting affected negatively now, and banks like his could be at risk if the ‘troubled’ banks do not get help. The point being that once things start going south, there won’t be anything to protect any bank or financial institution. Thus, even though it will in a sense reward those institutions that made bad decisions, he believes that the bailout is necessary because of the bigger picture.
With his permission, I am including some of his feedback on the situation. Given that his job is to directly with issuing credit, he has firsthand knowledge of what’s going on and the potential impact. His insight was refreshing and eye-opening.

Currently with all of these bank failures, there have been days when banks have stopped lending money to each other, due to liquidity shortages. [This relates to] supply versus demand. This in turn has force the LIBOR funding rates to go to record levels. What this means for each of you, is that for every tick it goes up, banks are forced to increase interest rates. Do you want 20% interest rates again? The only reason banks are failing today, is that there isn’t enough capital currently in the markets. Their requests for capital can’t be met. This in it’s self is scary. If the bailout doesn’t happen, several banks that made good sound decisions could fall into the same group of failing banks, which I believe we’d all agree is not the approach we want to see.
So basically, I’m saddened by anyone that says to hell with all of the people that made bad decisions, because it’s much bigger than that. The thing you have to remember, is that the federal government isn’t going to do anything where they aren’t going to make a buck out of it. They are basically going to be purchasing non-conforming loans from institutions for primary residences only, NOT investment homes that people took risks on. These loans that are deemed to be “non-conforming” were loans that were being paid as agreed until the rates jumped up to 20% or whatever the crazy rates are. If the government buys these, and is able to give a rate in the 5-6% range, which is todays market rate anyways, how is this not a good idea? I’d rather keep families in there homes rather then giving them no other option than to walk away. That’s not good for home values or anything else.
Big picture I view this plan, if structured properly, as a good thing. These are my main reasons:
(1) It hopefully stops the rapid decline in home values by keeping millions of people in their homes.
(2) It helps stabilize a volatile interest rate environment. Trust me, you don’t want to see what will happen if this plan doesn’t get approved.
(3) Banks will be able to have capital needs, hopefully with stricter regulations, to continue operations at least for the time being and hopefully years to come.
Hopefully I did a good job to explain how this is a much bigger issue than us just bailing out stupid consumers, because it’s much bigger than that.

I think he did a great job and thank him for his contribution.

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