Thursday, September 25, 2008

Crossroads of Depression and Free Enterprise

I'd like to hear, dear readers, your opinion of the current markets and the apparently imminent bailout. I'll admit I'm on the horns of a dilemma.

Philosophically, I'll almost always come out on the side of free markets and reduced control and spending by the government. Besides, I can't escape the feeling that things are not as bad as they are painted. I believe that prices have been driven down to an extreme, such that once the fear recedes, issues would be priced considerably higher and a good, free market bounce could occur. After all, mortgages are going for $.20 on the dollar, and I can’t believe that many mortgages will foreclose, not to mention that the residual value of properties that do foreclose should be at least 70-80 % of the mortgage value.

On the other hand, I'm not really familiar first hand with the conditions in the money market. Those who are and have the economics background to interpret what they see, for the most part, say the markets are grinding to a halt. And, at a certain point, fear begets fear, driving irrational markets to even more irrational pricing and spilling over into seemingly unrelated areas. I'm reminded of my Dad's summary of the Great Depression..."Most people had no money, and those that did were afraid to spend or invest for fear things could get worse. So, everything just ground to a halt." That sounds eerily familiar these days, although obviously that attitude is mostly on Wall Street so far, and the general economy is nowhere near those conditions. But, following the fear begets fear rationale and the tendency to spill over, it is possible to see that shaping up. And, that fear spiral is difficult for any company or individual to reverse. Perhaps that is a role of government.

Meanwhile, I can't escape the conclusion that government regulation has contributed to the situation with the "mark to market" regulations, and government encouragement of questionable borrowing. And if I’m right that the market has been driven far below rational pricing, could it be that government could not only reverse the market psychology but make a substantial profit in the deal? Ok, given usual government performance, that seems too good to be true! Even so, I’m convinced that anything that can reverse the market psychology could return us to a positive future path rather quickly and possibly avert a rather dismal period.

So, this is your chance...What say ye?

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