Sunday, August 26, 2007

Risk and Reward

Nouriel Roubini explains how the subprime meltdown is impacting the market.

I don't suppose the banking aspect of this will be any more deadly to the economy than the S&L scandal of the 80's. The bigger issue would seem to be a credit tightening since most of our real economic "growth" has been consumer driven by cheap, available money. When consumers can't buy that new flat screen for "no money down, no monthly payment," or when they lose the equity in their homes to draw against, I suspect they will decide they can do without.

Also, when big investors can no longer use massive amounts of debt leveraged against marginal assets to get rich quick, it's possible that the DOW - the Republican's sole measure of economic prosperity - might start to actually start to reflect its true value. I mean, have people really thought the market numbers this year are real? Do they actually believe there's been such an injection of value into the market that it justifies the 2000 point increase that took place between January and July? Doesn't that seem a little far fetched?

Not to confuse the issues, but one aspect of all this that makes me crazy is the way the deck has been stacked in favor of the investor class. Their rally cry is, "Regulation is bad! Government wants to kill growth!" And then at the first sign of trouble in the market their collective bottom lip begins to quiver and suddenly they're crying for a government bailout, Fed rate reduction, etc. In the ageless risk-reward paradigm, they expect to reap the reward while the taxpayers and consumers carry all of the risk. That's one of the reasons the bankruptcy reform legislation of 2005 really pissed me off... who didn't see this coming from a mile away? The financial community made a shit load of money by engaging in predatory lending that they knew to be risky. They fought every attempt at consumer protection against those lending practices. They further lobbied to ensure, via legislation, that when the party was over, the only one stuck picking up the tab would be the consumer. That's a nice way to rig the game, don't you think?


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