jump to navigation

Penny Wise, Pound Foolish 30 September, 2008

Posted by David Anderson in Uncategorized.
trackback

Here is a deal, we can borrow some money to protect us from losing trillions in wealth, doubling unemployment, and causing millions in the third world to die from lack of medicine, infrastructure, and food. We obtain assets worth several times what we pay for them, and be able to resale them at our convenience to make the most off of them. Who wouldn’t favor that type of deal?

People who oppose the financial rescue plan can’t get stuck in opposition. They risk being penny wise and pound (dollar) foolish. Something needs to happen and happen soon. I am not unhappy that it failed, but we will all be unhappy if we don’t get a new bill passed soon. It did not address deeply enough the problems I wrote about in February. We need to address the underlying issue by allowing people to lock in their arms at fixed rate no questions asked. We need to allow the value of the mortgage-derivative securities to be determined by the income they generate, just like we would the underlying mortgages. The Mark to Market (change the value to whatever thy sell for today) rule passed in the get the Enron frenzy is killing us. The former FDIC chairman and Donald Trump have now said the same thing.

The best way to understand the current market problem is with an illustration.

Imagine if you borrowed money to buy your car and someone came to you every week and said you had to see what you could sell it for and adjusted your down payment based on it. One week you had some transmission problems. It would cost you 1500 dollars to fix it. The bank came and demanded that you see what it would sell for today. The answer is nobody would buy it today, wait for a week. The car is still fine. The engine is perfect, the body is great, and it is still worth $6000 blue book. You owe $5000. The bank values the car at $500 and demands repayment. You can no longer afford to fix it so you let them repossess it.

Your friend helps you out by buying the car for $500 and spends $1500 to fix it. He borrowed the money. He then resales the car to you for $3000.

Was your friend the smart one or the foolish one? He borrowed $2000 after all for a broken car. No, he understood the real value. The foolish ones were the one’s who didn’t understand the value and forced the untimely sale.

The Congressional Budget Office (CBO) tell us this rescue bill will not cost us much (25B) in the long run. What will cost us is a deep recession or worse.

Don’t let revenge be an economic policy. Don’t trip over pennies and lose dollars. Let our leaders lead.

Advertisements

Comments»

No comments yet — be the first.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: