I've been thinking

Here are a few thoughts for the day:

I have been examining my pro-capitalist stance with all this mortgage stuff. There is one ingredient that should be in this mess that is not. What's missing is transparency. For capitalism/free markets to work, you need buyers and sellers who actually know what they are buying and selling. This mortgage-backed security stuff is missing transparency. It's not really mortgages that are being bought and sold. It's mortgage-backed securities. It's mystery meat from your high school cafeteria. It's various wild, weird, wacky stuff that is hard to realy get a grip on. It's too complex. The free market has been usurped by marketing. Form over substance. It's nuts.

The financial world is out of whack.

The other issue is inflation. All this money going for bail outs for lenders/big-time Wall Street investment companies, and yes, the silly voter stimulus package has to come from somewhere. The short version is that the Federal Reserve is just going to print more money. We'll borrow from China and elsewhere. We'll print billions of dollars to pay them back. Then there will be lots of extra dollars floating around. There will be so much money out there that we will be in a big inflationary situation next. It might take two to four years, but it's the only thing that can happen. We may well end up back in double-digit inflation.

So far as local real estate investing goes, maybe take advantage of deals for buy and hold (rentals). If getting loans fits your program, now is probably not a bad time to borrow, if you have good credit. Try to get fixed-rate loans. In the back of your mind, remember that before too long, we're going to be in an inflationary time. It's too early to act on it, but not too early to think about how you will approach inflationary times in your business.

Ben Bernanke and the Fed: Masters of 3-Card Monte

You have probably seen this game on TV. The guy on the street offers to play a game with a passer-by where there are three cards, one red and the other two black. He moves the cards around and asks you to pick the red card. The first time or two you get it right, then the street guy offers to let you win some money at this. Before you know it, you've lost all your money. Often times there is a shill or confederate involved.

Well, in my opinion, we are getting into the same thing with the Fed. Today it was announced that JP Morgan bought Bear Sterns, a big investment bank that was about to go bankrupt. (People lost confidence in them and more or less made a run on the bank to get their money out. Bear Stearns is an investment bank, and for that reason, deposits, investments, etc. didn't have FDIC insurance. If the bank bit the dust, the customers would not get their money back through Uncle Sam.) The Fed is lending this private company, JP Morgan, money to buy the company at $2 per share. Last week it was worth $30 a share and earlier this month it was worth $70 a share. (One of the guys at Bear Stern said the building alone is worth $8 a share...talk about a motivated seller!) Anyway, the Fed is lending the money through a back-door method since there charter doesn't allow them to take collateral directly. They are taking bonds as collateral. Funny thing...these bonds are those good-old mortgage-backed securities that nobody really wants now because people are in default on a lot of the mortgages.

This is the 3-card Monte part: How different is it to take the bonds as collateral instead of the bonds themselves? I am not a banker, BUT to me it seems like a difference without a distinction. This will make things interesting down the road. What will the Fed do with this collateral? My guess is...NOTHING. They want the mortgages (and the houses that would be foreclosed on) even less than the banks. They are even less prepared to take care of a bunch of re-po'd houses than the banks, that's for sure. And as a quasi-governmental organization, I don't think they really want the doo-doo on their fingers that comes from kicking citizens out of their homes. The Fed is supposed to HELP people with their foreclosure problems (or at least be trying to prevent an economic collapse), not foreclose on them.

If the intent was to actually secure the loan to JP Morgan (and others who will soon come to Uncle Sugar for a hand out), they made a foolish move in accepting collateral they would never want to own. They will never hold Morgan's feet to the fire if they, too, can't perform. My feeling is that there isn't really any intent to collect on that loan. It's just to make the hand-out appear to be a loan, and thus more palatable to the public at large. I also think it is a trial balloon. If there is no outcry (which there won't be), we will be paying for more of these mega-loans, one way or the other.

So what's the big picture? I'm not sure yet. I think we will end up gumming things up by trying to fix them. I think the law of unintended consequences will kick in, and at some point, we will find ourselves in more trouble than we would have been if we let the market thrash these banks. Being greedy, they would involve themselves directly or indirectly with making loans to people who won't or can't pay, and the market needs to correct them.