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Copyright by John T. Reed

Starting in September, 2008, there was a worldwide financial meltdown. Regular readers of this Web site have complained to me that during the weeks after the meltdown began happening, I was silent about it.

Not a blogger

I am not a blogger. Bloggers pop off instantly about everything. I am a professional author with 80 books and over 5,000 nationally-published articles. To write about an issue as complex and important as the financial crisis of the fall of 2008, I had to do a lot of reading and watching. Since pertinent events have happened about every other day, there is also the question of how can I write about it until it stops unfolding? On October 11, 2008, I finally felt I knew enough and had seen enough to comment intelligently on the subject.

Key questions

Whose fault was it?

What should we do about it?

Politicians pointing fingers

Incumbent politicians hate financial bad news because the other party uses it to defeat incumbents. As I write this, the Democrats are blaming the Republicans for the meltdown because they have had a president since 2001 and were in control of Congress prior to 2007. Obama’s poll numbers have jumped significantly since the meltdown—maybe enough to hand him the White House.

Are the Dems right? Partly. Republicans are, indeed, averse to regulations and enforcement of regulations. Lack of both contributed to the meltdown.

The Republicans say it’s the Dems’ fault because they blocked repeated Republican attempts at reforming FNMA and FHLMC and because the Dems enacted the anti-redlining Community Reinvestment Act which is a sort of affirmative-action program for “disadvantaged minority” wannabe home buyers.

Community Reinvestment Act

The Community Reinvestment Act (CRA) was signed first by Democrat President Carter. It was changed to push even harder for more “minority” mortgage loans by Republican President George H.W. Bush (Bush I) and by Democrat President Clinton. It is mortgage affirmative action.

My wife was an FDIC bank examiner for 21 years retiring 12/31/06. FDIC is one of the government agencies charged with monitoring and enforcing CRA. She says CRA contributed to the subprime crisis, but not as much as the Republicans claim. She is a Republican. I am a Libertarian. She primarily blames securitization of home mortgages and the opportunity for banks and Wall Street firms to earn fees from it for the crisis. Securitization means putting thousands of home mortgages into packages to be sold to Wall Street investors.

Democrat resistance to reforms

President George W. Bush and Senator John McCain among others tried repeatedly to force FNMA and FHLMC to lend more conservatively. Their public statements and proposed bill are quite easily accessed on the record. See a partisan blog that researched the matter. Democrats, most prominently House Financial Services Chairman Congressman Barney Frank; Senator Chris Dodd, Chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs; House Speaker Nancy Pelosi; Senate Majority Leader Harry Reid, and others. Senator Dodd received the most campaign contributions from FNMA employees of any senator. Barack Obama received the second most. Dodd also received special treatment on a mortgage he got from Countrywide, the nation’s largest subprime lender. Obama was a community organizer for ACORN, a trainer for ACORN, and legal Counsel for ACORN, a predominantly black, major pusher of subprime lending to “minorities.” He also has directed taxpayer’s funds to ACORN and other similar entities in his capacity as IL state senator and/or U.S. senator. Obama's campaign paid an ACORN affiliate, Citizens Services Inc. $800,000 for “get-out-the-vote” projects for his 2008 presidential primary campaign.

In her capacity as a federal bank examiner, my wife worked or bank requests to open or close branches, to merge with other banks and for new banks to start. She said that every, I repeat, every such application was opposed by a letter from ACORN. FDIC was then required to get a response from the bank in question to the ACORN complaint. FDIC paid little attention to ACORN complaints because when you oppose every single application from everybody for every action including both opening and closing branches, you don’t have much credibility. But the banks did not know whether the FDIC would defer to the ACORN opposition or not. In many cases, the bank would pay money to ACORN to settle the dispute and ACORN would subsequently withdraw their opposition.

If you turned back the clock to about 1990 and eliminated either the Democrat or Republican policies, the problem would be smaller, but not non-existent. You would have to eliminate both sets of policies to make the problem go away completely. Both parties and their presidential candidates are scum. They only different in the ways they are corrupt. Democrats never saw a poor person they did not want to throw the taxpayer’s money at. Republicans never saw a military program they did not want to throw taxpayers’ money at. In the subprime crisis, the Democrats favored policies that they believed would help them get black votes and low and middle class votes, regardless of the danger to the taxpayers. Republicans favored policies that would let businesses do what they wanted regardless of the danger to the taxpayers.

The basic pertinent Democrat principle is socialism which is invalid.

The basic pertinent Republican principle is deference to the free market which is generally correct, but which does not apply to areas where the taxpayers’ money is being used, or may be used, as in the $700 billion bailout. In other words, the free market is fine when the participants are risking their own money. It cannot be unregulated when the taxpayers’ money is being spent or risked. Corporate welfare is not always a bogus accusation.

Why did this happen? The regulators and politicians did not want to be party poopers. When prices were rising year after year, the warning signs were there, but the public did not think anything was wrong. Regulators are supposed to blow the whistle anyway. They generally did not either on their own initiative or because of political pressure not to. Politicians never stop parties. Preventing something that the voters are not worried about from happening gets you no votes. Politicians are only interested in votes. They could care less about stopping bad things from happening.

Made to sell versus made to keep

In the old days, like the 1970s, savings and loans made mortgage loans and kept them. Recently, banks and relatively unregulated mortgage companies made mortgage loans for the sole purpose of selling them to Federal National Mortgage Association (FNMA or “Fannie Mae”) and Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”) and other Wall Street firms. In the 1970s, mortgage lenders wanted to make good loans because they were “making their own bed and they were going to have to lie in it.” More recently, the mortgage originators only wanted to make loans that they could sell. Whether the loan turned out bad later was generally not their problem.

I am a real estate investment expert. One of the well-known facts in real estate is that buildings that were built by a builder who intended to keep the building for himself to live in or rent out as an investment are infinitely better buildings to own than buildings that were built with the intent to sell. I managed one of the latter once in Vineland, NJ. It was disaster. The various short cuts that the builder took to save money continually cost us problems and expense and made the building perform badly. The builder thought he would be long gone by the time we discovered all the problems and he was right.

(I did not buy the building. I was just a salaried property manager for the company that organized the limited partnership that bought it. But I was the face of the company to the unhappy investors. They would complain that it was my fault the property was underperforming. One group demanded a meeting with me. They came in intending to chew me out. They asked me why the building was underperforming. I told them. They leaned back in their chairs and said, “We were going to chew you out, but your analysis was so honest and informed that we have nothing to add.” One of their questions was to demand to know why the latest income statement I had sent out differed greatly and unhappily from the projections in the prospectus. I said, “Because the prospectus was bullshit.” I had not been associated with the company when it bought the building and issued the prospectus.)

Do not buy mortgages that were originated to be sold rather than held if you can avoid it.

‘Credit enhancement’

So-called “credit enhancement” was another big factor. You can sell bonds—which is what mortgages are—for more money if they are AAA. So Wall Street invented “credit enhancement.” With credit enhancement, some entity with a good credit rating says they will guarantee the bonds or mortgages in question. That is, if the mortgages default, the credit enhancer will cover any resulting losses.

That’s fine in theory, but it requires the person or entity buying the mortgages because of their enhanced credit to make sure the credit enhancer—companies like Lehman Brothers and AIG—can make good on the guarantee—even if millions of homes fall in value and go into default as a result.

One of the main problems is that the various credit enhancers were unworthy of the trust placed in them. They welshed or were about to thereby convincing the federal government that they needed to intervene.

Leverage

There is a business cycle of boom then bust then boom then bust. Leverage is borrowing money to invest in business or securities or commodities. During good times, people and entities tend to borrow a greater and greater percentage of the assets they own. This is dangerous, but it does not seem so at the time. The problem is that the more you borrow, the harder it is to survive bad times. The more you borrow, the less trouble it takes to bankrupt you.

As well explained by Robert Shiller in his book Irrational Exuberance, people keep claiming we have entered a “new era” when the old rules no longer apply. The y apply this bogus new-era theory to leverage among other things.

I have long had an article at this Web site about buying real estate for nothing down. I wrote a book called How to Buy Real Estate for Little or No Money Down. In both, I have long said that it is imprudent to lend more than 80% of the value of a property. It is only prudent to make such high loan-to-value ratio loans or mortgages if the loan is guaranteed by a person or entity who would qualify for the top 20% of the value of the property on an unsecured basis. In real estate, higher than 80% loan-to-value ratio mortgages are often made and prudently made because entities like the FHA or VA or private mortgage insurance companies guarantee the top 20% of the mortgage against default.

Numerous people contacted me telling me that I was out of date, that we were in a new era, etc. Bull! I was right. I told you so. The current crisis stems to a large extent from imprudent loans, called subprime. Those loans had two things wrong with them. 1. Their loan-to-value ratio was too high and the guarantor of the top 20% of the loan was not strong enough to fulfill the guarantee if a large number of mortgages defaulted simultaneously. 2. The character and capacity of most subprime borrowers was unsatisfactory as was well known from centuries of loan underwriting experience but they received the loans anyway.

Everyone involved borrowed too much. When you borrow too much, you cannot survive even the slightest downturn in your income or the value of the assets pledged as security for the loan—a house in the case of a home mortgage. The home buyers borrowed too much—as much as 110% of the value of the property. The lenders themselves also borrowed too much.

Banks are leveraged about 12 to 15 to 1. That means if you bought a bank, you would typically be making a 1/15 = 7% to 1/12 = 8% down payment to acquire millions or billions of loans. FNMA and FHLMC were allowed to raise their leverage to 32 to 1 as part of the “solution” to the first acute event of the crisis: the failure of Bear Stearns. That means that to buy the billions of mortgages they owned, you would only have to put down 1/32 = 3%. With that much leverage, your equity is wiped out by a mere 3% drop in the values of your mortgages.

The other players like AIG and Lehman Brothers were also highly leveraged. Everyone was betting that property values would keep going up. They did not. No one had enough equity to survive the change.

The mortgage foreclosure rate in the U.S. in October of 2008 is only about 2.5%. During the Great Depression, it was about 50%. So why is 2.5% causing so many problems? Leverage. If you only have a tiny percentage of equity in your home or bank or mortgage lender, you are wiped out by a tiny increase in foreclosures. The normal foreclosure rate is around 1%.

Irrational exuberance and irrational despair

Former Federal Reserve head Alan Greenspan called the stock market and real estate market euphoria of the late nineties and early 2000s “irrational exuberance.” Yale professor Robert Shiller repeated the phrase in the title of a book I just finished reading in October, 2008. It causes people to pay ridiculously high prices for stocks and real estate. During the dot-com boom, people were accepting ridiculous price/earnings ratios and even price/sales ratios (in the case of corporations that had never made a dime of profit) for stocks they bought.

For example, in 1998, eToys had $30 million in sales and lost $28.6 million, yet the stock price of the company made it worth $8 billion. At the same time, Toys R Us had sales of $11.2 billion and profits of $376 million but it was only worth $6 billion in the stock market. eToys went bankrupt three years later, meaning it was worth next to nothing then.

People get that stupid in both directions. In October, 2008, Charles Schwab has a market value of $21 billion based on its stock price. It also $27.8 billion in cash in its bank account. That means you could buy it for $21 billion by buying all the stock, then shut it down and pocket the $6.8 billion difference (assuming Schwab does not owe a lot of money. If they do owe a lot of money, one would wonder why they did not use the cash to pay down the debt). Actually, Schwab should use the cash to buy back its own overly cheap stock because the company clearly has substantial value above and beyond its bank accounts. The Wall Street Journal’s Jason Zweig says at present (10/11/08), 10% of all publicly-traded companies are valued by the stock market at less than the amount of cash in their bank accounts. You need to see the value of their other assets and liabilities to draw a definitive judgment, but as with Schwab, one would expect that they would pay off their debts if they had more cash than their market capitalization.

In Anchorage, AK in the late 1980s, people fell into irrational despair about that market. Prices fell to ridiculously low levels. One of my California readers followed my advice to go invest there. He bought a 4-plex for $130,000. He put $3,900 down and had $6,955 positive cash flow the first year from the property. That’s a 178% cash-on-cash return! That window of great opportunity slammed shut fast, perhaps in part because I told my readers nationwide about it and a number of them went there to buy and word spread.

The current irrational despair will create huge bargains in both stocks and bonds and probably already has. Stock companies will probably start paying more dividends to make their stock more attractive to investors so they can raise capital to expand. Many companies and their insiders will probably buy their own stock back because they know the company produces far more net income and net assets than the stock market is currently giving them credit for. Recently, banks were allowed to buy their own stock back. That was previously prohibited. Because the market is being so idiotic about the values they are imputing to the various banks, the banks’ management and remaining shareholders are getting a fabulous bargain by buying back their own stock.

The market shifts from “growth” to income over time. “Growth” means people buy a stock or real estate because they believe it will go up in the future. When that belief is not present—as now—the market switches to an income orientation. That is, investors will value stocks and real estate according to the amount of income it throws off. The less you pay for a stock or property, the greater the return you get from its dividends or cash flow. When the prices fall ridiculously low, the income returns get ridiculously high. At the same time, as the dopey masses rush to buy bonds, bond yields fall, thereby making the dividend yields on stocks and the cash flow of rental properties even more attractive relatively speaking.

The Great Depression

The Democrats and media are trying to encourage as much fear of a Depression as possible to get votes and ratings. It’s working. Obama will probably get elected and have filibuster-proof majorities in Congress. God help free enterprise and the future prosperity of the American people.

People think the Great Depression was caused by the 1929 stock market crash. Nope. It was caused by the Federal Reserve keeping money too tight. And prolonged and deepened by tarriffs and government intervention into the free market. Th Fed is bending over backwards to avoid that now. Fed head Ben Bernanke is reportedly one of the leading scholars of the causes of the Great Depression. But Anna Schwartz is another. She co-wrote a book on the causes of the Depression with Milton Friedman. She thinks Bernanke is misdiagnosing and mistreating the causes of the current economic crisis which are not the same as the one in the 1930s. In particluar, she thinks liquidity was a big problem then, but not as much now. She also thinks the Alan Greenspan-run Fed caused the recent subprime crisis.

Unfortunately, the other big cause, the Smoot-Hawley Tariff, is not under Bernanke’s control. And the politicians will sell out the nation to get re-elected. Furthermore, Smoot-Hawley type tariffs would have a much greater depressing effect now because of the greatly increased level of international trade now compared to the 1930s.

We already had evidence that today’s politicians will condemn Americans to a deep depression via tariffs in the Ohio Democrat primary. Both Hillary Clinton and Barack Obama sucked up to Ohio voters by promising to renegotiate President Bill Clinton’s NAFTA treaty, which eliminated many tariffs.

The majority of Americans, especially Rust Belt voters like those in Ohio, are too ignorant to understand that tariffs hurt the countries that pass them. They see it as the repatriation of jobs. In fact, tariffs hurt the countries that pass them, in no small part through retaliatory tariffs by the other countries who can no longer sell to America. That kills jobs in both countries and the hurt far exceeds whatever jobs “come back” to the protectionist countries. Virtually all economists agree on this, and they rarely agree on anything. During the Depression, 1,028 of them in the U.S. signed a petition against the Smoot-Hawley tariff, to no avail.

Follow the money

Watergate’s Deep Throat famously directed Bob Woodward to “Follow the money.” Those angry at the subprime mess should do the same. In doing so, they will find out something that no media story has revealed. Most of the lost money went into the pockets of those who sold their homes from 2004 to 2006. My oldest son is currently trying to buy his first home. The houses he is looking at sell for about $300,000. a couple of years ago, they sold for about $550,000. They are all foreclosures.

Who got the $550,000 when they were at that level? Mostly the home seller—probably about $250,000 in a typical case. The various bad guy middlemen in current media stories—real estate brokers, mortgage brokers, Wall Street investment bankers, FNMA/FHLMC, bond-rating agencies, banks—had to split among them about 10% of the sale price or about $50,000. Multiply that by all such deals and you get the share for the various parties.

Were the buyers who have since defaulted on the mortgages bad guys? Yes. They typically lied on their mortgage application. If not, they would not have gotten the loan. The lenders did stupid things like not verify the income and net worth statements made by the borrowers. But they did not make loans to those who did not make or have enough as far as what they claimed was concerned. Who taught and coached the borrowers to commit those felonies? Probably those on commission who interfaced with them during the deal, that is, real estate brokers and salespeople and mortgage brokers and salespeople.

Lying on a mortgage application violates 18 USC 1001, 1012, 1014. Those are all federal felonies, that is, they carry both fines and prison sentences. Persons charged with those crimes are also usually charged with mail fraud (18 USC 1341), wire fraud (18 USC 1343), conspiracy (18 USC 371), and racketeering (18 USC 1961 et seq.). These are also all federal felonies.

On TV, subprime borrowers typically depict themselves as victims who did not know what they were doing. They’re lying. They were speculating that homes would continue to go up in value and they would get rich from the appreciation as a result—all before the foreclosure happened. They knew they could not afford the payments, especially on the loans that were to reset to higher interest rates. They just bet—with taxpayers money we now realize—on continued rising prices. they knew exactly what they were doing. The media and Democrats who are now depicting them as victims and demanding that the bailout protect “their homes” are also lying.

Executive compensation

Politicians and media are focusing on some high executive compensation. That nonsense has been going on throughout America for decades. It is an outrage and part of a broader problem called corporate governance. Corporate executives are supposed to have the interests of their shareholders at heart. In fact, the CEOs hire and fire the board of directors that is supposed to represent the shareholders. The boards do whatever the CEOs want, including approving scandalous compensation, golden parachutes, poison pills, and a number of other things that harm shareholders. The problem, which is well described in the 2008 book The Gridlock Economy is too many owners. If a corporation is owned by five shareholders, the CEO will damned well do what they want or they will fire him. But when there are five million shareholders, the CEO can ignore all but major shareholders—if any—who would have 51% of the vote on the board. Because ownership has been atomized, no single shareholder has the power to get the CEO to behave, nor do the tiny shareholders have the motivation to exercise their rights to organizer the shareholders into groups big enough to compel good behavior.

However, excess executive compensation is no more than 1% of the subprime mess. Realtors® and mortgage loan officers got more collectively, if not individually, than Wall Street executives. Most of the money went to the sellers who are generally innocent of any misbehavior. As with previous similar scandals involving REITs, LLCs, and S&Ls, millions of bad deals were done to entitle relatively small (per deal) fees for a relatively small number of commissioned salesmen and Wall Street executives. The public’s focus should be on reforming the laws to prevent recurrence of such problems, not on a small number of corporate executives. I do not oppose punishing corporate executives and boards who misbehaved, but the main focus needs to be on correcting the mess and preventing it from recurring, not class envy about a small number of salaries and bonuses.

Bill O’Reilly

Bill O’Reilly is one the main idiots pushing executive-compensation justice as the main focus of media coverage of the crisis.

Jim Cramer of Mad Money

The meltdown seems to have revealed what Mad Money host Jim Cramer really is about. I have seen two pertinent clips. In one, from early 2008, he made fun of those who advocated selling Lehman Brothers, calling such an action “silly.” Lehman has since gone bankrupt which means those who did not sell lost every penny they invested in Lehman Brothers.

I did not say to sell Lehman Brothers. I do not make any such recommendations in either direction. The reason is no one knows about such things including me. But Cramer surely did say to buy or keep Lehman stock. And that was disastrous advice. The fact is he did not know what he was talking about and had no business making any comment either way.

I have also seen a shaken Cramer somberly telling people to remove from the stock market any money they will need in the next five years. That was his salient reaction to the stock market crash in the fall of 2008.

Excuse me. Not putting in stocks money you will need to spend in the next five, or even ten, fifteen, or 19 years is ancient, standard stock market advice. It is the advice that all competent, honest stock market experts have been giving for decades. I believe you will find that advice, roughly speaking, in the following highly-respected books:

Unconventional Success by David Swenson
The Intelligent Investor by Benjamin Graham
The Little Book of Common Sense Investing by John Bogle
Capital Ideas by Peter L. Bernstein
Capital Ideas Evolving by Peter Bernstein
The Four Pillars of Investing by William Bernstein
Winning the Loser’s Game by Charles Ellis

It’s also in my book Succeeding which I finished writing in July, 2008 and came off the press in August, 2008.

I have never paid much attention to Cramer. I see him ranting when I surf channels on TV. I would simply dismiss him and anyone like him as being more certain about everything than anyone can legitimately be about anything. As long as the stock market bubbles around more or less normally, guys like Cramer can rant and rave and predict and recommend and not get exposed. But when the stock market moves like it did in 2008, people like Cramer are revealed for what they really are: bullshit artists.

Greed

Greed is another thing blamed for the meltdown. Greed is ever present. Those who are charged with protecting taxpayers from stuff like this need to assume there is always greed and design their programs so as to make sure greedy people do not rip off the taxpayers. For example, there are all sorts of safeguards (although not enough given the occasional scandal that we read about) to prevent people from collecting money from social security that they are not entitled to. Why? Because we know greedy people will do that if they are not stopped.

Which candidate is best to preside over corrective action on the economy and reform of the bad practices that caused this?

Probably McCain, but both he and Obama are jokes as far as being president of the U.S. is concerned. I would not be surprised if neither McCain nor Obama has ever reconciled his own checking account. In the world of high finance, these guys are babes in the woods. I doubt they even knew the definitions of the various finance terms in the media stories about the crisis until they got briefed. They are also both demagogues who will sell us all down the river via more government programs and spending, more pork (McCain doesn’t request it, but he votes for it), protectionism, scapegoating Wall Street and capitalism, socializing previously private businesses, and more.

What does McCain know about money other than marrying it?

What does Obama know about money other than how to get it from the publisher of your failed-when-it-was-first-published autobiography by getting a speaking gig at the 2004 Democrat Convention?

Neither of these guys has ever run a business or even worked for one. Except for a brief stint as his father-in-law’s celebrity P.O.W. greeter, McCain has always been a government employee or the son of a government employee. McCain was literally born into the federal government. (His father was an admiral.)

Obama’s qualifications to run the world’s largest, most advanced economy

Obama’s checkered resume lists a never-discussed year at Business International Corporation in NYC (editing two international business periodicals right after he graduated from college My book How to Write, Publish, and Sell Your Own How-To Book has a chapter about editors in which I complain strenuously about wet-behind-the-ears brand-new college grads ineptly editing my real estate investment articles when I was 30 years old.) and apparently three years at the New York Public Interest Research Group (a proclaimedly “non-partisan” organization that seems only interested in liberal stuff).

He was a Catholic Church community organizer for three years in Chicago then went to law school. After that, he got a fellowship at the University of Chicago and spent most of his time writing his autobiography, which flopped after it was published in 1996. It later became a best seller after he made a speech at the 2004 Democrat convention and the book was re-issued. He then worked on registering black voters. He was a part-time lecturer at the University of Chicago Law School for twelve years. In that “publish or perish” profession, he published exactly nothing in his field. He was associated with a law firm that was involved in black voting rights and local economic development but let his license to practice law lapse in 2002. Barack Obama has less experience in business and finance than the vast majority of people reading this article.

The recurring theme in his life is impressing various white mentors and supporters who then let him play the eternal dilettante writing books and/or endlessly campaigning rather than ever working at the job he’s being paid for like the rest of us.

It appears he has spent his adult life just fiddling around a few hours a day. He took five years to write his first book: Dreams From my Father. I have written 81 books. It takes about nine months part-time to write a full-length book, not five years. He must have been doing a lot of sleeping late, knocking off early, and sipping white wine to need five years to write a book, especially an autobiography where he did not have to do any research or interviews.

If you want a president who has some competence in the current economic crisis, write in Mike Bloomberg’s name. Absent some huge surprise, we will probably get either Obama or McCain, neither of whom is qualified to run any aspect of the federal executive branch other than McCain might be knowledgeable about working with Congress. (Many think McCain is qualified to be Commander in Chief of the U.S. military. No, he’s not. He was a light attack bomber pilot and P.O.W., not a general. With a refresher course, he is qualified to be Executive Officer of a light plane squadron. He’s better qualified by far to be CIC than Obama and the other non-Wes Clark candidates, but not adequately qualified.) Obama draws a paycheck from the Senate but probably knows less about the Senate than the DC area teachers who take their classes there for tours. Both candidates are especially unfit to be involved in economic policy.

Being ignorant of the various functions of the executive branch means that they will have to rely heavily on expert advisers, but it also means that they each know so little that they have no way to tell which advisers are best. Instead, they will determine which adviser to listen to according to the “bedside manner” of that person. Economists and capital markets experts will push Obama or McCain around on financial issues. Generals and admirals will also push both around although less so with McCain. Diplomatic service veterans and foreign leaders will push Obama around on foreign policy. Congressional leaders will push him around on working with Congress. McCain will be pushed around less, but that doesn’t mean he knows what he’s doing when he resists their pushing. He is more likely to reject expert advice, but no more likely than Obama to make the right decision. Fundamentally, neither man will know what he is doing as president. It will be on-the-job training for both.

Senate experience is nothing but jaw-flapping experience—plus a way to learn how the Senate works for Biden and McCain. Obama doesn’t know how to find the men’s room in the Senate. The presidency is an executive position. Sarah Palin is the only one of the four candidates with executive experience and her executive experience would not be enough to get her past the first interview if the job were awarded like important executive positions usually are.

These guys also have political advisers and will let them trump the substance advisers every time.

Media and Democrat sensationalism

Both the media and the Democrats have disgraced themselves in this crisis by pushing sensational accounts of dire problems. Fox News’ Shepherd Smith is fond of using the words “economy” and “subprime” interchangeably. The economy is Coca Cola and your dry cleaner and the teachers at your local Catholic schools. It’s true that lots of subprime mortgages are in default—actually just 6% of U.S. home mortgages are currently in default. But it is not true that the economy and the subprime mortgages are the same thing.

Smith also likes to tell you how many trillions of dollars of 401(k)s were wiped out by various one-day movements in the Dow. But when the Dow went up over 900 points on 10/13/08, did Smith note how many trillions that added to 401(k)s? Nope. Why? Probably because he and the rest are about ratings, not truth. The proper fact to report is the percentage by which the Dow went up and down, not talk about dollar amounts without explaining how many people worldwide own those stocks. Smith and others say the percentages, too. They should only do that. The dollar figure is extremely misleading and alarming to those not knowledgeable enough to ignore it and focus on the percentage.

The media is also fond of graphs that do not have zero as the bottom of the vertical scale on the left side of the graph. Rather they put the recent high of the Dow or S&P 500 or whatever at the top left of the graph and the current figure at the bottom left of the vertical scale. That dishonestly makes all drops look like 100% drops. If they used graphs with zero as the bottom of the vertical scale, you would get a proper perspective on the meaning of the movement of the index. On the first day of the crisis, the San Francisco Chronicle had a front page graph that dropped from the top of the page to the bottom of the above-the-fold part of the front page. It was a 2% drop.

Both the media and the Democrats want or almost want a Depression because it would be good for ratings and getting votes. That’s why they are trying to talk the nation into believing we are having one. Unfortunately, with Depressions, that can be a self-fulfilling prophesy. FDR famously said, “We have nothing to fear but fear itself.” His phraseology suggests that fear itself is no big deal. In depressions, fear itself is the only necessary ingredient and can trump all other facts. Democrats and the media are throwing as much gasoline as they can on the fear fire to give themselves more power.

Democrat Senator Schumer is fairly accused of having deliberately started a run on Indybank that led to that bank’s failure. Democrat majority leader Harry Reid said that a huge household name insurer he refused to name was about to go out of business. All huge, household name insurers then had to issue news releases swearing it was not them.

Obama’s solution

One of Obama’s solutions is to pronounce a 90-day moratorium on foreclosures. Excuse me. That is immunity from having to pay your mortgage payment for the most dishonest, irresponsible homeowners in America—at the expense of the bank shareholders, other mortgage lenders including individuals who invest in mortgages, and the taxpayers who guarantee deposits used to make mortgage loans.

McCain’s solution

McCain would forgive the amount of mortgage debt that exceeds the current market value of a house whose owner is behind on their payments. He would also lower the mortgage interest rate to 5%. Who gets stuck with that loss? The taxpayers.

In other words, those who were so dishonest and irresponsible that they borrowed more than they could afford to pay, then did not pay their mortgage payments, get a gift of tens of thousands or hundreds of thousands of dollars in debt forgiveness. They also get a 5% mortgage. That rate is lower than people who paid their mortgages on time can get.

People who do not pay their mortgages should have to move out and let the lender sell the house to a real buyer who can qualify for a mortgage. Most of those in default should probably be locked up, not rewarded with taxpayer’s money for felony fraud.

The “solutions” of both candidates are pure political bullshit. Neither cares about anything but getting past the election with a majority of electoral votes. No legality. No fairness. No justice. No sensible finance. Just vote counting and posturing.

The correct solution is to do nothing and let the lenders foreclose. If any lenders are too big to fail or too interrelated to fail or any of that, the federal government should make them a loan, but not otherwise get involved.

What should we do as individuals?

Most discussion of the crisis is from a macroeconomic perspective. That would be useful for the king of the world. However, there is no such person. And even if there was, you and I aren’t him.

I think a big part of the problem is that our citizens are ignorant of economics, markets, free enterprise, and business. Furthermore, our college students have long been the targets of socialist indoctrination by America’s college professors and to a lesser extent by our public school union teachers. In the public schools, the problem is less socialist indoctrination than just plain lousy education and ignorance. But this has allowed us to evolve into a situation where when there is a speed bump in free markets, like gas price increases or falling stock market indexes, our citizens want free markets replaced with government-run markets. “Government-run markets” is a contradiction in terms. Cuba has such a system. We will be far worse off if we go that way and we seem to be doing just that.

But other than complaining about it, what can you and I do?

As individuals, we need to just deal with the world and the nation the way it is. Complaining about the way it ought to be or used to be is a waste of time.

Leaving the country

When George W. Bush was reelected in 2004, one of my son’s college classmate friends was so disgusted that he left the country. Where did he go? He joined the Peace Corps. I thought that was funny because the Peace Corps is a federal government agency of the executive branch. Like all federal government agencies, the Peace Corps’ ultimate boss is the President. George W. Bush’s portrait is in every federal government office including those in the Peace Corps.

My point here is, don’t get nutty and leave the country for a general unhappiness with election results. Am I saying that no one should leave the U.S. over economic issues? Not necessarily. It used to be that the U.S. was the country most committed to free enterprise. That may not be so if Obama is elected. It may not even be so already. My father-in-law lived most of his adult life as an expatriate American living overseas. Many do that. It is a fairly common and reasonable way to live your life.

Depending upon the specifics of your skills and goals, it is possible that you may be better off living and working in a country with a greater commitment to free enterprise than the current or Obama-ized U.S. That could be a greater general commitment or just a particular niche that is better overseas than in the U.S. I have known some guys who have spent their adult lives living in the Middle East where they have a lot of oil money to spend and need Western expertise for many of the new businesses they now want.

Study the changes, take appropriate action

If you stay, as most probably should, you need to look at the changed rules in the U.S. Also at the changed market aside from government laws and rules. In recessions and depressions, overall business volume shrinks. For most commissioned or self-employed persons, that means their income goes down. Many salary or wage employees see their income drop 100% because they get laid off.

But some people—those who work in countercyclical industries—see an increase in income. An example of a countercyclical industry would be foreclosure specialists like auctioneers, asset managers of foreclosed properties, foreclosure lawyers, regulators who work in the new bailout-created agencies. There are also new industries or ways of doing things that arise and prosper during recessions and depressions, not because there is a recession or depression, but just because they are good businesses with great products or services and relatively little competition.

Stuff got invented during the Depression, including baby food, nylon, TV, and photocopiers. There were new hit songs, dances, and clothing fashions during the Depression. All sorts of new ways to do business came into being during the 30s. Some were government-supported like deposit insurance for banks and 30-year, fixed-rate, low-down-payment home mortgages. Others were pure market-based like the rise of shopping centers, increased ownership of cars, people moving from farms to the metro areas and people moving from urban areas to the suburbs.

Basically, economic opportunities decline during recessions and depressions. But they also change. If you are adversely affected by a recession or depression, you need to change yourself. Study the new market and take the action you need to capitalize on the new opportunities. That action may be moving to a new part of the U.S. or the world. It may be getting new knowledge or training that qualifies you for more attractive opportunities. My Succeeding book is big on the importance of the structure of your career. If you have been a salaried employee your whole life, and get laid off, maybe you should try a new structure like commissioned sales or your own business. My book is also big on achieving an optimal match between your strengths and weaknesses and your career. Most people never do that in their whole lives. It is always the best approach and important but it becomes far more important during hard times.

There are also economic shifts as people become more bargain conscious. Campbell’s Soup stock goes up. Ruth’s Chris goes down. Costco and Wal-Mart go up; Nordstrom’s down. More fuel-efficient cars go up; SUVs go down. And so on.

Many people got rich during the Depression because of the Depression. Many other became rich during the Depression in spite of the Depression. The fact that there is less overall opportunity does not mean there are not many attractive niche opportunities. If we get hard economic times, your focus needs to be on finding a better economic situation for you and your family. Do so with confidence that the opportunities are there. Whining about the demise of the late lamented economic good times like the lyrics in the Depression song Brother can you spare a dime is not helpful. Find a way to win, not excuses for losing.

The BEST article I have seen on why the meltdown happened is this one by Michael Lewis, author of Liar’s Poker, Moneyball, and other books.: http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom.

Here is an op-ed piece written for the New York Times by Warren Buffet, one of the top three richest men in the world. I agree with it. Normally, I do not publish others’ writing. But in this case, I believe he wants these thoughts distributed as widely as possible. The piece may also be at the New York Times Web site. It was sent to me in an email.

Op-Ed Contributor
Buy American. I Am.
By WARREN E. BUFFETT

Omaha

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company


To be continued