We are faced with the biggest financial crisis since the Great Depression, or so they say. If Wall Street collapses Main Street will also, or so they say. If the government doesn’t step in and buy up all the bad mortgages then millions will lose their homes, or so they say.
The headlines and the talking heads have been heaping up a whole light of gloom and doom lately and in the wake we the American people and more especially the tax payer are headed for disaster. We can ill afford the plans being offered and the actions about to be taken. You cannot continue to cover up a mistake with a bigger mistake and hope no one will notice.
Let me present a simple little story to try to make a point. A local furniture store opens for business with the hope of making a profit by selling its wares to the local community. In the process they stock inventory that they hope will appeal to the local population. Some of it does and some of it doesn’t. Some of it is priced where the average person can afford it and some of it is priced way beyond the reach of the local community. Those things that appeal sell quickly while those that don’t sell are marked down to a price where they will sell. The business learns what the market wants, adjusts its inventory and repeats the process having found a formula that creates a long lasting relationship with the customer in the community.
Another furniture store opens for business and does a good job for awhile but management doesn’t understand the needs of the community. They stock inventory that suits their own desires and ideals and for awhile they see some sales but they begin to taper off. The furniture is just too expensive for what it is and the local economy can’t afford to splurge on these items even if they wanted the styles this store has to offer. As sales continue to fall, they finally reach a point where they can no longer stay in business. The last month the store has signs hung in the window that read ‘Going out of business Sale’ as they try to reduce their stock and payback their creditors. The final days see the owners taking any price on the remaining inventory in an effort to clear the books. The bargain hunters and shoppers find items finally at a price they can live with and clear out the remaining inventory of the store.
Meanwhile the successful store sees a slowdown in its sales temporarily as the ‘going out of business sales’ have taken away some of their shoppers. This only lasts for a little while though, as the successful business continues to provide their community with the right mix of product and price.
This is how business has worked in this country and around the world for years. That is what capitalism is about. Freedom to enter the market and exit the market as the market dictates. If you do things right you are rewarded, but if you do not get things right, you correct your methods or you go out of business. It works on a small scale and it works on a large scale.
If the government decided that the second furniture store should stay in business and decided to loan them enough money to pay their salaries and utilities and they stepped in and bought at full retail all the furniture they couldn’t sell, they could keep this company in business but only for as long as they were willing to pay for their salaries, utilities and buy their crappy inventory. If the company continued to operate the same way as they began it would take continued infusions to let them continue to exist.
Also, how fair is this to the first company? They also wish to remain in business but they have a plan that works and they have been successful in implementing that plan. They do not need the assistance or handout of government nor do they seek one. Is it fair for them to have to pay taxes that are transferred to their competitor just because he is not able to meet the needs of his customer? Is it fair to penalize the first company and reward the second? Is this the government’s role?
If we truly believe that America is great and want it to continue to be great, then we trust in those things that made it great. Freedom is one of them, Capitalism another. This is not a matter of scale, but rather of core values.
If the financial institutions have bad paper on their books then let them mark them down to true value and take the hit to the income statement. If they no longer want to own them, let them take them to the market place and get whatever price another is willing to pay. There is generally a market for everything; you just won’t necessarily like the price. If after selling off your bad inventory and you still find yourself in business then congratulations you are still alive and kicking. If after selling off your bad inventory and you don’t have sufficient cash flow to survive, then close shop, learn your lessons and start again.
Learning the lessons is not an easy thing to do. Some never learn. Some give up and never try again. Some try again but end up doing the same thing they did the first time. Some actually see what they did wrong; make adjustments and move on to bigger and better things. There must be consequences both for when we fail and when we succeed. This is America at its finest.
So what is wrong here, or should I say what are some of the things that are wrong here because there are many and that means there is not a simple single fix that will take care of everything.
As much as there is a cry against deregulation, that is not the problem. There is still more than enough regulation to choke a horse it just needs to be applied, consistently and equally to one and all, no favoritism. This runs throughout the financial world and many aspects of our economy.
The housing problem is a very large issue and one that has been compounded by previous bad responses. It is a market bubble with many providing the hot air to blow it up. Stemming from the last mortgage bail out of savings and loans with the RTC, the continued tax subsidizations that Congress passes to promote debt, and the tax laws that encourage and advantage those that speculate in real estate, it is no wonder that the bubble has ballooned to a point of explosion. If we continue with these proposed fixes then we are just slapping a band aid on the balloon and trying to force more air into the bubble.
All balloons can only hold so much air. There is only one way to find out how much it will hold, and after you find out, it will never hold that amount again. Then you are left looking for a new balloon.
Instead of all this governmental intervention to circumvent the markets, let’s make a way for the market to take over and work the way it was meant to. Let stability return to the market place naturally. Let the rules work naturally as they always seem to do no matter how much governments try to change them.
We will get through this. I just don’t want it to be harder than it has to be.
This is Ed Nef with a view from the Farr West.
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