The Money Game

I’ve had so many people ask me what I thought about the bail-out and what it would do to our industry and economy, I thought I’d comment on it here on the ole blogosphere. 

First the cons — from my non-verified sources, Hank Paulson was one of the main players at Goldman Sachs that orchestrated this prestigious investment bank to a 30 to 1 leveraged position.  Now, the same Hank Paulson is orchestrating the bail-out for his buddies.  Not only that, he’s requesting no government oversight for the money, and that executive compensation is a lynch-pin in the program.  (Meaning they won’t force these overpaid CEO’s to lower their own compensation, which was part of the greed that manifested this situation.) 

When this goes through (notice I said when, not if), tax payers will be on the hook for the egregious over-leveraging and risky positions created by some of the wealthiest companies and individuals in history.  So for those of you that didn’t want big government, you just got it forced down your throat. 

The dollar will weaken and be worth far less than what it was a day, a week, a month, and a year ago.  This means not only will you pay more in taxes, you’ll be able to buy less with the over-taxed amount you receive.

Now the pros — The economy should stabilize somewhat.  At this point it’s all speculation as we’ve never, never experienced this kind of challenge in our economy.  (I said never twice just for emphasis.)  The issue that this prevents is a total melt-down of our economic engine.  The gears of that engine — investments, real estate, new business growth — would all grind to a halt until the nation (read those who lend money) felt like we were in a stronger position and their investments were a more sure thing.  The fact that Warren Buffett pumped $5 Bills into Goldman should tell us something — I’ve read his biographies, this guy doesn’t put money into something unless it’s on absolute fire-sale or it’s a sure thing.

Your house shouldn’t lose as much value this year as it was supposed to.  Notice I didn’t say your value will go up.  It just shouldn’t lose as much.  We’re still in a weird market for real estate and I don’t think we’ll see the market back to robust until at least 2011.  What that means for those of you with cash is there will be a ton of bargains in your backyard and the smart ones will lie in the weeds and ultimately snap them up.

Your retirement accounts shouldn’t lose the value compared to what would happen if the bail-out didn’t happen.  This was probably one of the biggest fears of the Fed — if the stock market lost 1,000 or 2,000 points you’d see hundreds of millions of dollars in retirement money evaporate.  Companies that relied on the liquidity of their stock selling would not have the funds for growth, expansion, raises, etc.  Instead, they would most likely cut their fixed expenses (i.e. your job).  Unemployment would soar, and the economy would most surely drop into this recession we’re allegedly not in.

My take – we’re in this mess because a whole lot of people got really greedy.  Including the consumer.  We’ve experienced quarter after quarter of GDP growth and almost all of it was based on new acquisition of debt.  We’re overleveraged on Wall Street, we’re overleveraged in Washington, and we’re overleveraged at home.  The theory of efficient markets is correct — this market will correct itself.  And in my semi-professional opinion, this economy has to shrink back to normal, before we can again grow to super-size proportions.  We got too big, too fast by spending money that wasn’t our own.  And now, we’re going to pay even more for the simple things.

People are still going to lose their homes.  It happens when your expenses exceed your income and you have nothing to fall back on.  And instead of making it the government’s fault, or the lenders’ fault, as Americans WE HAVE TO TAKE PERSONAL RESPONSIBILITY FOR EDUCATING OURSELVES ABOUT MONEY. 

It’s not a message that will win an election, but it’s what I believe.

To your prosperity,
Adam