“The Bush administration is hardening its opposition to the chorus of Democrats, bankers, economists and consumer advocates calling for a big-money government rescue program for struggling homeowners.”
(to read the entire article, clink on this link:
http://www.smartmoney.com/bn/smw/index.cfm?story=20080228102127)
The business people I know are probably praising the Bush administration for holding the line. After all, why should people who took on foolish debt obligations be allowed to skip out on them? When irresponsible people don’t make good on their obligations it leaves the responsible people – both debt payers and debt holders – holding the bag. But based on some of my recent reading, I won’t be surprised if the end result of the sub-prime mortgage crisis is some form of wholesale debt cancellation.
On a principled level, the idea of canceling debts seems wrong (provided you believe some governing authority has the right to legalize fractional banking and paper money creation). But from a practical aspect, the lenders – and the government – may have no choice.
In a 1988 book (now out of print) titled “Usury, Destroyer of Nations,” author C.S. Mooney provides an interesting history of debt, from ancient to modern times. In general, Mooney notes that debt follows a regular cycle of expansion then bust. At the point where large segments of the population are destitute and can no longer pay their debts, governments are faced with the prospect of widespread social unrest. And lenders, having repossessed or collateralized every asset and wrung every possible payment from the borrowers, have little hope of squeezing more blood from the turnip. For everyone’s safety, a repudiation of debts solves everyone’s problems – and allows the process to start all over again. Politicians can rule, and lenders can lend because borrowers have some of their collateral restored.
Mooney mentions several ancient examples of debt repudiation, among them:
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The Biblical story of Nehemiah after the Jews had returned from Babylon (for the full story, see Nehemiah 5:1-13)
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The Greek ruler Solon who declared that “all persons enslaved or attached for debt were released, those sold into servitude abroad were reclaimed and freed.”
Some commentators think Solon’s efforts were not a full repudiation of debts, but rather a restructuring. In either event, the attitude of the ancient rulers was the same as today: To maintain order (and keep lenders in business), it may be necessary to occasionally “take a loss” to return things to their “natural state” (i.e., the masses are mollified, the lenders get rich, and the politicians stay in power).
When politicians and lenders fail to heed calls for debt relief it can be disastrous. An unsympathetic Marie Antoinette said “let them eat cake,” and the populace responded with “off with her head.” The ignorance of the czars eventually led to the Bolshevik revolution. The corruption of Batistista (including his acceptance of the Mafia, some of the toughest lenders on the planet) gave Castro the popular support to become a dictator/liberator.
Granted, not all of the reasons for these revolts were exclusively financial. But prosperous people don’t usually resort to civil protest. When financial oppression rises, so does the inclination to violence and revolution.
In addition, the ability of the contemporary governments to arbitrarily print more money makes a bail-out/debt forgiveness plan more likely because it can be disguised. If necessary, lenders can be “paid” worthless paper to project the illusion of solvency. The reality of course, is that no real value has been tendered as repayment; but then again, no real value was loaned by the banks either. In a twisted way, one sham transaction can appear to reconcile the other.
Politicians may not learn all the lessons of history, but they are smart enough to learn the ones they need to keep their positions. Bottom line: If a bail-out makes political sense, it will happen.
The Pirates of Manhattan (A follow-on from Investing vs. Speculating)
November 15, 2007
“The trouble with mutual funds is they are rewarded for the money they attract, not for the money they earn.”- George SorosAnother way to identify a financial scheme as speculation (as opposed to investment) is to determine the amount of compensation that goes to the individuals or institutions sponsoring the scheme. The more the sponsor gets paid, or the more that the compensation for the sponsor differs in comparison to the way investors are rewarded, the greater the likelihood for speculation being the true lot of the “investors.”
Remember, just because some financial scheme is classified as a speculative program doesn’t make it immoral or evil. But as mentioned previously, speculation requires different forms of evaluation, and a different set of expectations. And from my perspective, mutual funds are the biggest and most pervasive vehicles for speculation available to the general public.
For the past decade, I have made the generalization that mutual fund shareholders are not really investors, but simply “savers with risk.” I make this statement because the only control mutual fund investors can exercise over their investment is whether to be in or out. If you’re in the market as a mutual fund shareholder, you are simply along for the ride; somebody else is driving, no one has a map, and where you’ll end up is a guess.
The financial media tries to portray the fund managers as “trained experts” that understand the stock market. That’s a myth. Daily evidence tells us that their supposed expertise is easily overridden by an infinite number of financial, political and natural events. And while their specialized knowledge of might provide some hindsight perspective on why things happened in the past, the reality is that past events are not a reliable indicator of the future. (And every mutual prospectus makes this perfectly clear.)
Since the tongue-in-cheek dart-board stock picking contests often do as well as (or better than) the experts, it’s possible to conclude that the primary function of a fund manager’s “expertise” is to convince you that while neither one of you knows where you’re going, you should let him drive.
The best way to make money in mutual funds is to be part of fund management. Regardless of performance, guaranteed management fees are built into every fund. Whether the fund increases or decreases in value, management gets paid, and the pay scale for mutual fund management is astonishing. Your investment in the fund can lose money, but the managers still get paid. And if the fund does well, they get paid even more.
In his new book, “The Pirates of Manhattan,” author Barry James Dyke provides a detailed account of the jaw-dropping levels of compensation top executives at mutual fund companies receive. In a chapter titled, “Never Met a Man who Made His Millions in Mutual Funds,” Dyke makes a strong argument that mutual funds are a “sucker’s game” in which the individual investor never makes as much as management – while taking all the risk.
Dyke quotes Addison Wiggin and William Bonner from their book “Empire of Debt:”
“The scene would be depressing if there weren’t something gloriously comic in it. Wall Street is doing nothing evil; it is merely doing its job – separating fools from their money.”
