Atlas shrugged?

It’s hard not to be worried. The stock market drops 40%. Housing values tumble. Banks start hoarding cash and the credit markets grind to a halt. We have a lame duck president and Al Qaeda is poised to terrorize YOU. O.K., so I made up the part about Al Qaeda. I am not the first person to do so. In a way I am going to miss Al Qaeda. Just like the U.S.S.R during the Cold War, Al Qaeda has been a comforting scapegoat for all that ills America. Oil skyrockets: blame Al Qaeda. Giant budget deficit: Al Qaeda. You have to take off your shoes at the airport: Al Qaeda. This burger is too well done: Al Qaeda left it on the grill too long. You get the picture. For the financial crisis, there is only one place to point the finger. (yes, THAT finger): At you, America.

When unemployed hippies can get a zero-down “stated income” loan on a $200K house and car salesmen routinely ask “what payment did you have in mind” for your 6 year auto loan. Where condos in Miami had been bought and sold nine times in a year before the building was even started, each time appreciating 30%.--A pyramid scheme which worked out just like any other pyramid scheme for the banks when the last guy couldn’t pay their mortgage and the foreclosed property ended up being worth half the appraised value. When it was common to refinance 100% of the value of a home to an “interest only” loan and use the cashed out dough for plasma televisions and vacations and now that appraisal looks like a typo when folks find themselves upside down on their McMansion they can’t afford … on and on and on. How could anybody think this was going to work out any differently?

If you didn’t see the crash coming, you are dumb.

Just like pets.com looked like a good idea to some investment dummies in 2000, an interest only balloon loan on a condo that was ten times what a person could really afford looked great to the same kind of dummy in 2005. Remember 2005? If only I had sold my house in 2005 and pitched a tent someplace, toughed it out, and then started looking today. There are sure some good deals out there if you have cash (to burn?) and an 800 credit score.

…And so it begins again. The next bubble. The next great (bad) idea. The foundations of the next bailout…

In his investing commentary piece published October 10, 2008, John Schloegel offers the hopeful vision that we have learned our lesson. Re-Booting-America

His point; that previous generations have come out of things like the Great Depression and World War Two more ethical, honorable, and “better equipped to deal with adversity” for the experience. He says that the last 25 years have brought a “soft-underbelly” to America that has been largely flushed out in the past weeks. This underbelly was painted on with easy credit and short-sighted spending. With too many folks focusing on the stuff they want now, without thinking through the next year, or five years, or fifty years. He believes that a return to the “good old days” of frugality, reason, and honor are at hand. Atlas has shrugged.

I think that Mr. Schloegel is on to something. The real test will be the upcoming Christmas shopping season. There is already fear in the retail industry that folks will cut spending and this will be the last straw for the economy. I believe that if folks stay home, and don’t buy Playstation 3/ Plasma TV combos on credit this Christmas season, it will push the country further into recession. THIS WILL BE JUST WHAT THE DOCTOR ORDERED. I will take it as a sign that the folks who refinanced themselves out of their homes, or got credit they did not deserve, may actually have learned their lesson. The rest of us sitting on the sidelines might add to our savings accounts, buy or fix up our affordable homes, and teach our kids that “stuff” isn’t really all that important. It won’t be fun for anybody. A lot of folks will lose their jobs. A lot of folks will lose their homes. A lot of folks will learn to like leftovers. A lot of folks will have to rent while they save up a down payment just like their parents did. A lot of folks will see a therapist for the first time. (Looks like Doc L will be O K—some industries are recession proof!) A lot of folks will have to give up satellite television, rollover minutes, and a faster internet connection… Their I-phone, I-pod (have you seen what happened to Apple stock last week?!) and their daily double caramel chocolate latte mocha…

These things will hurt. But it will be a sign that Americans can actually learn from their mistakes every generation or so.

Sooner or later, things will get better and we can get back to blaming the boogeyman, inflating the new bubble.

ML for HDP 10/14/2008.