Thursday, September 25, 2008

Doing Nothing

Once again Barry Ritholtz offers a dose of reality at The Big Picture. He reminds us of the retail stock brokers world. The "just one more trade and we'll get out of this" approach. Sobering reading.

Arnold Kling at Pajamas Media, reminds us that as with all things economic, there are winners and losers, risks, rewards and losses. These are inherent, even when the choice is to do nothing:

"If Congress goes home having sent financial institutions a clear signal that there will be no bailout of any kind, then sellers will bring their securities to market, and we will find out what the market thinks they are worth.

In the worst case scenario, the market will assign low values to the securities. Firms that are sufficiently capitalized to hold mortgage securities will earn profits at the expense of weaker companies that have to sell securities or go bankrupt. In the end, it may turn out that the winners really took advantage of the losers. That is capitalism at work in financial markets."

What seems to be getting lost in the entire panoply of news is the simple fact that real prices are set by the real world. If your down 20% on the value of your home, you will still be down 20% regardless of who holds your debt. When a stock is over-valued, there are more sellers than buyers, and the price drops, regardless of what the government does, or even can do.

It wasn't so long ago that the talk in the financial world was all about the private equity (cash) "sitting on the sidelines". Private investors large and small have been bailing out of the market for years. (That drop in the ocean is mine). The real losers in the proposed bailout are those of us who have been living within our means, keeping our debts to a minimum, and staying honest.

Doing nothing allows those on the sidelines to step in and get a good deal at the expense of those who have been reckless. Politics, being what it is, that is unlikely to happen. Conventional wisdom dictates that the friends of congressmen will be rewarded, the taxpayer will be sold a bill of goods, and honesty will be its own reward.

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