Jim's Op-Ed: Welcome To Pottersville

It’s a wonderful life.

Tax the successful to prop the flailing and failing: as social policy it’s the hallmark of civilization, as investment policy it could be the downfall of it.

In the aftermath of Freddie Mac and Fannie Mae’s downfall and federally mandated life support, the veracity of our free markets is at stake, as is the viability of investors to freely invest in it.

After years of robust economic and market growth, suddenly we’re in a measurable and painful slowdown where losses are the rule. People who borrowed more money than they could afford to repay are finding their complement in bankers who overreached in terms of chasing gains who now want a bailout. No doubt class action lawsuits for the investor class are next.

But, rising stock and home values, like actual stock and home ownership, are not inalienable rights. Investing and home ownership always comes with risks; and understanding those risks as well as one’s own risk tolerance for them, are crucial to being an investor and homeowner. Caveat emptor.

The upside to such risk taking: the potential to benefit from rising values. The emergency brake: if your risk tolerance, financial circumstances, or real or perceived valuations changed, you used to be able to get off the train. Now, we’re being not only being told what our money has to be invested in, we’re also being told that we can’t step away from the vehicle.

Our Treasury Secretary (who bares an uncanny resemblance to a hybrid of Daddy Warbucks and Mr. Henry Potter), and our well meaning Fed Chairman (whose hall is overrun with investment banker stoats and mortgage lender weasels), are forcing investors and taxpayers to bailout investment banks, and sub-prime enablers like Freddie Mac, Fannie Mae, and Indy Mac. Who cares?

If you are one of the 79 million Americans in a diversified 401K plan, or even if you own just one S&P 500 index fund, you have just been taxed twice (forced to take a loss as a shareholder and then forced to loan money to fund the bailout). What’s worse?

Leaving aside the question of how much worse the banking crisis is going to get (I’ve seen Black Holes that looked more appealing), carefully consider the above fact: we’re being forced by our government to fund the bailouts of banks and bankers whose investment value, let alone return on investment, is impossible to know. The reason: we’re being told that a collapse of the mortgage market, and by extension the overall market, perhaps even the global market, would ensue. Would it?

It looks like we may never be allowed to know. But in not letting the free market stand the truth of Freddie Mac and Fannie Mae failures, we have now become conscripted as the new sub-prime lender of choice. Instead of returning to banks that know and own their customers, so that their customers might know and want to own them, our tax dollars will perpetuate the eternal recurrence of the same: propping up bankers’ revenue generating lines by enabling them to create more loans than were good for their own customers’ or investors’ bottom lines.

As for the assumption that the government can solve this current crisis, consider its bona fides: mandated ethanol, healthcare, Social Security to name but a few. The latter snafu is the most galling: due to decades of government mismanagement of social security, not only are we burdened with being taxed for that bankrupt system today while having to simultaneously secure our own retirement nest egg, but we’re now being taxed for the bailout of bankers and banking systems who stand to gain a much brighter future than us, thanks to us.

Not so? Did Anthony Mozilo (of Countrywide shame) have to give back so much as a tan line for fanning the flames of the conflagration we’re currently battling? One thing is certain. His heirs will have the last laugh at our expense: while they’ll have hundreds of millions of Countrywide dollars to support them, we’ll have been forced to mortgage our financial future in order to secure a sub-prime one for ourselves.

Like I said, welcome to Pottersville.