Opposed to Bailout
Guest Post by Darel Ansley of Peoples Bank in Wenatchee
I have had a lot of high level finance discussions in the last few weeks with my colleagues and clients throughout the Leavenworth and Wenatchee area. The one positive thing I can state is that for the first time in many years, I am finding agreement between liberals and conservatives: everyone seems to be against the taxpayers bailing out Wall Street.
I am mostly asked about the things in relation to the impact to our local economy and local Real Estate market. Here is my top-down view: First, I was amazed to hear a so-called expert on the radio today state that this really wouldn’t cost the taxpayers any money, because in a few years, these $700 Billion worth of investments will turn profitable, and the federal government would come out ahead. I firmly disagree: If these are investments that will be profitable in a few years, then they are truly assets and would be valuable to lots of people.
In case people have forgotten, in the Spring of 2007, Bear Stearns tried to package up a bunch of these investments and offer them up as a new stock in an IPO (Initial Public Offering). It was shot down faster than a scud missile. Nobody wanted to buy that junk. Now it would have sold at some price, but they didn’t want to be forced to disclose the true market value of the stuff they were reporting in their annual report. (Does anyone remember Enron).
Here is the best solution to the current problem- instead of selling these things to the American public, lets have them put the assets out on the open market. They aren’t completely worthless; they are backed by mortgages, not all of which will default. So there is a certain cashflow stream that can be estimated for these investments. I say offer these things up and let the free market decide what they are worth, and let them be sold and taken off the books of these offending firms. If the net value of a company drops when it only gets $10 Million for something they listed on their books at $100 Million, so what? Will some go bankrupt?, Sure. That is the risk they took when they made these investments.
Oh we of short memories; take a look at this 2006 year end article which not only shows the record bonuses paid out to all employees of these firms ( average bonus $137,000) but also says “Bear Stearns and Lehman Brothers set records for profits.” No where have I heard those names recently?
So here is my prediction of impact to Leavenworth Real Estate: If the Presidential pardon passes, the stock market rallies for a month or so until the cost of the program is financed with the issue of government securities. The glut of securities in the simple free-market supply and demand equation drives down the price and drives up the interest rate on debt. Now interest rates have risen to where it costs real companies more to operate, and profits decline, sending the stock market back down. So all the money spent and we still end up with a recession, and now the new President has no money left to finance a decent energy program. The Leavenworth buyers who are typicaly from Puget Sound, will find themselves facing higher interest rates to buy 2nd homes, and also some economic uncertainty within their professions and their 401-Ks, causing them to look at a second home purchase as “a little risky right now”.
If we go ahead and let the companies take their lumps, certain ones will fall, other pulled down by the dragging stock market will become huge buying opportunities and investors will be able to buy in at some great prices. The Arabs and Chinese who have a lot of money to invest will find someway of getting it to those who want to borrow; either directly, or through government bonds again. We have a global economy, and that money will flow. Letting these companies fail will not lead to a depression, except perhaps in the households of those who earned the $137,000 bonuses.
So in terms of Leavenworth Real Estate, the financial markets would recover faster, companies will be able to borrow more cheaply and keep peoples jobs, 401-Ks will rise faster, and the country can get behind the next President and start feeling positive about their future. And for many Puget Sound residents, part of a positive future could be an awesome vacation home in beautiful Leavenworth.
I think we are all grown up enough to know that either choice is going to require a little pain. At least from my Eastern Washington perspective, I ‘d much rather go with the free-market medicine than the stuff the government is cooking up.