Thursday, March 12, 2009
Walk and Chew Gum
Unemployment in the United States has reached a high of 5.3 million. And, while many many economists have said that a bigger stimulus package is needed to pull our domestic economy out of the current recession, and to prevent a possible depression, the Republican members of Congress find fault with the fact that President Obama can walk and chew gum at the same time.
Before we restart our economy, the foul lines need to be put down in something more than chalk dust. The games that are played on Wall Street require real regulation and our government’s commitment to put in place enough trained people to enforce the rules. The Madoff Fraud, while perhaps one of the biggest headline catching of all the wrong doings that took place, is certainly not the only one.
Over the years the apparatus that was put in place to protect the investor, whether large or small, was systematically destroyed by a political philosophy of deregulation. Money to the politicians from Wall Street paved the way to have the safe guards, that were put in place generations ago to protect investors, weakened to the point that a fraud of $50 billion could occur. The new financial instruments, such as credit default swaps, that have come along since the original rules were set in place, must be included when the new regulations are written.
The talking heads of TV news programs and the people that come on their shows do not know enough about the way the capital markets operate to make intelligent noises about what needs to be done. There are people on President Obama’s team of advisors that understand the capital markets and know the changes that must be made before the flow of credit can once again be truly a world wide bond market. Confidence in the credit ratings assigned to collaterized mortgage obligations (CMOs) and other structured debt instruments is very basic to the flow of credit around the world and the lifting of our economy, and thus our stock market.
Stocks will eventually (once again) sell at a price earnings ratio, but only when there are tangible earnings and some indication that the earnings per share are moving in an upward direction. While this may be several months or a year away, the growth in earnings will come to our economy, and those that can see beyond the next several months will be rewarded. There are many corporations that will make a strong comeback when this economy turns.