The LA Times is featuring an article that highlights how federal intervention in the mortgage mess may end up helping the wrong people.

The House and Senate are beginning to consider proposals for federal intervention on a massive scale. In effect, the government would take over many of the risks now borne by lenders, borrowers and investors — offering to revamp and then guarantee about 1 million troubled mortgages in an effort to shore up plunging home prices.
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“There’s been a long tradition — dating back well before the New Deal — of saving the family home or the family farm,” said Michele Landis Dauber, a Stanford University professor of law and sociology and author of “The Sympathetic State.”

And in almost every instance, a simple calculation tipped the balance in favor of action: Although some who were undeserving might end up being helped along the way, the benefit to society as a whole was simply too substantial to ignore.

Instead of “helping the troubled homeowners keep their homes” let them do what most people who cannot afford a home do: RENT!!!

Kool-Aid, Economy, Real Estate | 1 Comment »

CNNMoney.com is reporting a doom-and-gloom scenario that highlights the chaos on Wall Street caused by banks’ fear of loss threatening to bring down the financial system.

We’re suffering the aftereffects of the collapse of a Tinker Bell financial market, one that depended heavily on borrowed money that has now vanished like pixie dust. Like Tink, the famous fairy from Peter Pan, this market could exist only as long as everyone agreed to believe in it.

So because it was convenient - and oh, so profitable! - players embraced fantasies like U.S. house prices never falling and cheap short-term money always being available. They created, bought, and sold, for huge profits, securities that almost no one understood. And they goosed their returns by borrowing vast amounts of money.

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How is this slowdown different from other slowdowns? Normally the economy goes bad first, creating financial problems. In this slowdown the markets are dragging down the economy - a crucial distinction, because markets are harder to fix than the economy.

A leading political economist, Allan Meltzer of Carnegie Mellon, calls it “an unusual situation, but not unprecedented.” When was the last time it happened in the U.S.? “In 1929,” he says. And it touched off the Great Depression.

We’re not going to paraphrase the entire article. We’d love to add some insightful KoolAidMan commentary, however the article speaks for itself echoing many of the statements that Drinking Is Believing has been providing since its inception.

So, after all this, we end up with the same old story. Whenever you see a financially driven boom and people tell you, “This time it’s different,” don’t listen. It’s never different. Sooner or later, the bubble pops, as it has now. And you and I end up paying for it.

Drinking is believing…

Financial Market, Credit, Kool-Aid, Investing, Economy, Stock Market | 1 Comment »

CNN reports that a house oversight committee is preparing to investigate why three CEOs with ties to the mortgage crisis were paid $460 million over five years.

The panel, chaired by Rep. Henry Waxman, D-Calif., will hear testimony from Charles Prince, former CEO of Citigroup Inc.; Stanley O’Neal, former CEO of Merrill Lynch & Co.; and Angelo Mozilo., chief executive of Countrywide Financial Corp., the nation’s largest mortgage lender.

The memo states that the three companies combined lost more than $20 billion in the last two quarters of 2007, as investments related to subprime mortgages fell apart. Meanwhile, the stock of Citigroup, Merrill Lynch and Countrywide declined drastically.

“The hearing provides a lens through which to examine whether the executive compensation and severance arrangements at these companies provided appropriate incentives to protect shareholders from these losses,” the committee said.

While we don’t agree that those executives deserved such insane compensation, is it really the government’s job to decide what appropriate compensation is? Perhaps the shareholders and investors who lost money should be determining the appropriate course of action.

Kool-Aid, Schadenfreude, Real Estate | 2 Comments »

Wow! We’re finally back. After a severe bout of depression suffered after hearing so much negative news regarding our economy, the housing market, and international politics, the KoolAidMan finally decided it’s time to stop crying and hiding and write another post!

Yahoo news is reporting that the heavy dependence on the stock market for retirement is causing many people to worry.

With Americans relying more heavily than ever on the stock market to fund their retirements, Wall Street’s slide has some starting to worry they will struggle financially in old age.

Even worse, the housing crisis has reduced what employees are able to sock away, and some are even tapping their retirement money for everyday expenses like food and gasoline.

All this has reopened a debate over 401(k) retirement plans offered by many employers in the United States, which give employees responsibility to save for their own retirements and also some control over their investments.

Pension plans are nice, but at least with a 401(k) we have the option to decide what we want to invest in. How many pension plans have been burned are are still getting hammered because of some involvement in mortgage-backed securities? There are still problems on Wall Street and each day we’re learning more and more about them.

Of course, financial advisors, who make a living from giving people investment tips, say that the best strategy is still to hold one’s nose through the tough times and rest assured that, over the long-run, stocks tend to be the best performing assets.

“In times of market volatility, often the best move investors can make with their 401(k)s is to sit tight and do nothing at all,” said Greg McBride, senior financial analyst at Bankrate.com in North Palm Beach, Florida.

Historically speaking, that may be the case, but what does all that historic data mean when we’re experiencing a financial situation that has not ever been experienced before? Consider the explosion of the US housing market and all the cool little tricks that were played to circulate some cash through our economy. Top that with an economic explosion in the most populous country in the world and record energy prices and we’re entering some uncharted territory. Historically, the US economy has proven that it’s very tough and can recover well from any setbacks. Will the same hold true again, or is this time very different?

No matter what the outcome is, there’s no harm in minimizing personal debt and learning to live a healthy and happy life without spending too much money.

Kool-Aid, Investing, Economy | 1 Comment »