Saturday, October 04, 2008

Mark to Market - Stop the Posturing

Bring mark-to-market back and stop bankrupting solid businesses. What Ronald Reagen said was "government is not the solution to the problem; government is the cause of the problem". Some efforts are being made to bring back the disastrous government Resolution Trust that was to clean up the failed savings and loans. The RT when about destroying businesses that had great value but couldn't borrow money without liquidating their assets; therefore going out of business. All businesses that had more value than debt were thrown in the same pot as those who had overextended their borrowing in relation to their net worth. Businesses that could have survived but couldn't borrow the money were forced into bankruptcy.

That's what is what is helping screw up an economy that is not as weak as it is perceived by the public, the world and the investors.

Now the government has given authority to the Treasury to develop trust among the lenders so that deserving businesses can borrow money and at a reasonable rate. Caterpillar, as solid a company as there is in the marketplace, recently had to borrow money at a much higher rate because of the lack of confidence in the overall worldwide economy. Without the ability to borrow and at rates commensurate with the companies overall worth, most businesses will eventually fail.

No, Caterpillar is not going to fail despite the fear of investors, a small minority who are currently selling and bringing the stock prices down. The value is still there and should increase with stong sensible management.

The problems we are facing have not been brought on by solid businesses that are seeking to expand but by government interference in the free market. We don't need more regulations, we need less regulation and more common sense. We do need proper enforcement of regulations now in place.

Selling solid assets at fire-sale prices is not the answer to our current situation. Our own bureaucratic government demanded with increasing intensity that lenders lend to people with bad or no credit and then government backed Fannie Mae and Freddy Mac sold these unsound mortgages with the paperwork to private financial institution who sold to other financial institutions.

How did this mess start? The rating agencies, the originators of the mortgages and some greedy investment firms, along with the appraisers who had over valued homes to make them more attractive to lenders. When homes and buildings started to fall in value and interest rates rose, under funded borrowers could not meet payments. A domino effect was created, as the dominoes fell, financial institutions lost trust in each other and investors lost trust in the market. Once trust in the market failed, values of finacially strong companies were forced to pay more for borrowed money or couldn't borrow at all. Huge finacial firms quickly folded (one cause of the failure of Indy-Mac was Democrat Schumers public suggestion that that troubled bank "could face collapse", casuing a deposit run) or were forced to sell.

Big brother, who had caused a great deal of the problem despite many warnings, mostly from the Republicans, now has stepped in with a bail-out plan that should be unacceptable to most common sense business minded people. it gives the Treasury too much freedom to put the money where it not needed instead of where it is most needed and where the loan is most likely to be paid back to the government.

That in itself is wishful thinking on my part because history shows that money paid back is usually spent on some other loose government spending project.

Statements made by some of the leading Democrats in Congress, caused runs on banks, loss of trust, panic to the investors and chaos in the marketplace. Recently, Harry Reid publicly talked about a "troubled insurer" "with a name everybody knows" causing a steep drop in in stock prices and costly million or billions to middle-class investors holding stocdk in insurance companies considered healthy.

Bring back the mark-to-market rule, stop allowing unrestrained short selling, ask the lame duck administration to be more positive, let the buyers who didn't really make an investment in their homes, lose these homes, let the speculators, most of them, go broke, stop lending to people who can't afford the payments and the upkeep, vote some of the irresponsible leaders out of Congress like Reid, Frank, Dodd, Schumer and Rangel, to name a few who are largely reponsible for this situation, out of office. And create less regulations while enforcing the regulations that are now law.

Politicians, please stop posturing and catering to a populist majority and the "chatterering" class. And common sense people, please become more involved in the workings of your government before it is too late.

After all, two years ago the Democrats came into power. Has our outlook of our economy and trust on government been improved? This Congress has the lowest approval rating of any Congress in modern times.

We need fresh faces in our government like Sarah Palin. She is "quick" study. Whether she wins or not, she will be a strong force in the transition of the Republican Party and our federal government if whe wishes to be.

No comments: