I remember back in 1998 the stock market was booming. Some all-knowing Wall Street buccaneer by the name of Wade B. Cook had written a book called “Bear Market Baloney,” the gist of it being the current bull market was locked in and could never end. We had finally figured out what makes the market tick and it would remain forever strong. Everyone who was anyone in the financial world had a copy of Cook’s “Baloney.” Today anyone who is interested can pick up a hardbound copy of “Baloney” for about $2, that’s about $28 off the original price.
The housing market was at an all-time high in 2006 and was off the charts in Phoenix. New arrivals to the Valley of the Sun were standing in line to bid on homes even before the developers had them built and there was no end in sight. A great moneymaking scheme tied into the Phoenix housing market. It seems folks who had put a down payment on a house a couple of years before, now had a great deal of equity in their house because of the rising market. They could borrow against that equity, make a down payment on a second house, then rent the second house for enough to cover the payments. In a couple of years they figured to duplicate the procedure with the second house and so on.
This all sounded pretty good, but I started thinking about when the government made farm loans easy to come by back in 1978. They were telling farmers and ranchers “Gear up, America is going to have to feed the world.” The Federal Land Bank jumped right into the program with low-interest loans. We were told to mortgage the ranch — buy all the equipment we needed. Dad and I both had pickups, all the horses and dogs we needed and Mom had chickens and a car, so we didn’t mortgage the ranch.
By 1986, we were getting brochures from the Federal Land Bank listing ranches and farms all over the U.S. that could be had just for paying off the mortgage. It seems we didn’t have to feed the world after all on account of cows belching hydrocarbons into the air and causing global warming. I bought a ranch in Oregon from the Federal Land Bank and paid only a fourth of what it had been listed for two years before.
So, this wasn’t my first rodeo in 2006 when some of my friends couldn’t understand why I wouldn’t invest in a house in West Phoenix. They told me I was missing the boat and they were right. I missed it — the Titanic.
Today some of those same folks seem to think I know something about the economy, so they ask when I think the housing market will return to its former highs. Some of them seem stunned when I tell them, “It won’t.” I believe the market was forced to an artificial high. It never belonged there. It was driven by government-implemented lending practices that brought about easy credit and it isn’t coming back. Now the government has reeled in the credit line and it’s time to pay the piper.
But, the government is going to fix it, right? So what are they doing? The policy is the same, Republican, Democrat, Bush or Obama. They give the bank executives billions, they buy up the banks, or they buy up the bad notes, but they don’t want anyone to call it socialism. With the last two courses of action, they are nationalizing the banks. In all three cases they are ignoring the poor folks Obama said he was going to help.
Had the government divided the $750 billion they handed the banks between the folks who owed the money to the banks we would still have had rampant inflation, but each family would have had an excess of $250,000. They could have paid off their homes and the banks would have been solvent again. The government is trying to keep the elephant alive by sticking hay up his … They are feeding the wrong end of the elephant.
As for the stock market, its very life’s blood is the free enterprise system. Why would anyone think the market is going to return to its former highs under the Obama policy of higher capital gains taxes, higher corporation taxes and a multitude of socialist programs? If the market crisis were a sinking ship, the correlating government solution would be to put more water in the lake.
Como Siempré, Jinx