Venting

[MarkBarbieri]

I overheard someone at the grocery store complaining about the economy. No surprise there. I was frustrated, however, by how little this person and the person they were talking to understood. There were two issues that they were concerned about and they understood both of them poorly. They were complaining about having lost so much of the money in their 401K to greedy bankers and they complained about the government giving away $700 billion.

First, if you lost money on stocks that you bought, no one has taken that money from you. I can best explain what happened to that money with an analogy. Let's say that we both bought the last two apples at the store for $1 each. Later, someone that loves apples came up and offered to buy one from us. We both wanted our apples, so we refused to sell. Finally, they offered $10 and I sold my apple. You still had your apple and now you considered it to be worth $10, because that is what they are selling for. The next day, you decide to sell your apple (maybe because you don't want it anymore or maybe because you need the money). The problem is, no one seems to want it now. You finally find someone that will buy it, but he is only willing to pay $0.10. So your apple was worth $10 and is now worth only $0.10. No one got the $9.90 that you "lost". The market value of the apple varied based on what other people were willing to pay for it. The intrinsic value (how tasty and nutritious the apple was) probably didn't change.

Learn a lesson from this. The stock market is not the place to put money that you will need in the near future. What people are willing to pay for a share of a company can change very quickly. The stock market is a risky place in the short run. Buy companies with real value and hold them for the long run.

As for the $700 billion bailout, that's another subject. First, I am not a big backer of the bailout. It would certainly not be my preferred solution, although it could very well be better than doing nothing. My concern was the characterization of it "giving away" $700 billion. What the government decided was that they would authorize $700 billion for buying mortgages (or mortgage backed securities). These mortgages are real assets that have real value. No one is quite sure what that value will be in the long run because no one knows how many will default and how soon they'll default. The government might gain or lose money on these purchases. It is certainly valid to complain that they shouldn't risk taxpayer money on these mortgages. It is not valid, however, to say that they are giving the money away.

The whole situation is frustrating. From some people, I hear the constant refrain that the Bush administration is to blame because of their policies. These complainers can rarely point to any specific policies that they want to blame and often point to issues like the loose regulation of Fannie and Freddie that the Bush administration was actually fighting to tighten.

From other people, I hear that it is the fault of liberal special interests like ACORN that forced banks to loan to poor people. They seem oblivious to the fact that the majority of the defaulting mortgages are not held by low income borrowers.

Get a grip people. These problems are complex. There is no simple solution. Neither Obama not McCain has any trick up their sleeve that will make these problems go away. Quit trying to demonize people. It's not going to help. Vote for the people that you think will do the best job in running our government but also accept the fact that smart, caring people will see things differently than you and vote for others. They aren't stupid or evil. They just see things differently.

OK, I'm done venting now.

 

[mrsv98]

I overheard someone at the grocery store complaining about the economy. No surprise there. I was frustrated, however, by how little this person and the person they were talking to understood. There were two issues that they were concerned about and they understood both of them poorly. They were complaining about having lost so much of the money in their 401K to greedy bankers and they complained about the government giving away $700 billion.

First, if you lost money on stocks that you bought, no one has taken that money from you. I can best explain what happened to that money with an analogy. Let's say that we both bought the last two apples at the store for $1 each. Later, someone that loves apples came up and offered to buy one from us. We both wanted our apples, so we refused to sell. Finally, they offered $10 and I sold my apple. You still had your apple and now you considered it to be worth $10, because that is what they are selling for. The next day, you decide to sell your apple (maybe because you don't want it anymore or maybe because you need the money). The problem is, no one seems to want it now. You finally find someone that will buy it, but he is only willing to pay $0.10. So your apple was worth $10 and is now worth only $0.10. No one got the $9.90 that you "lost". The market value of the apple varied based on what other people were willing to pay for it. The intrinsic value (how tasty and nutritious the apple was) probably didn't change.

Learn a lesson from this. The stock market is not the place to put money that you will need in the near future. What people are willing to pay for a share of a company can change very quickly. The stock market is a risky place in the short run. Buy companies with real value and hold them for the long run.

As for the $700 billion bailout, that's another subject. First, I am not a big backer of the bailout. It would certainly not be my preferred solution, although it could very well be better than doing nothing. My concern was the characterization of it "giving away" $700 billion. What the government decided was that they would authorize $700 billion for buying mortgages (or mortgage backed securities). These mortgages are real assets that have real value. No one is quite sure what that value will be in the long run because no one knows how many will default and how soon they'll default. The government might gain or lose money on these purchases. It is certainly valid to complain that they shouldn't risk taxpayer money on these mortgages. It is not valid, however, to say that they are giving the money away.

The whole situation is frustrating. From some people, I hear the constant refrain that the Bush administration is to blame because of their policies. These complainers can rarely point to any specific policies that they want to blame and often point to issues like the loose regulation of Fannie and Freddie that the Bush administration was actually fighting to tighten.

From other people, I hear that it is the fault of liberal special interests like ACORN that forced banks to loan to poor people. They seem oblivious to the fact that the majority of the defaulting mortgages are not held by low income borrowers.

Get a grip people. These problems are complex. There is no simple solution. Neither Obama not McCain has any trick up their sleeve that will make these problems go away. Quit trying to demonize people. It's not going to help. Vote for the people that you think will do the best job in running our government but also accept the fact that smart, caring people will see things differently than you and vote for others. They aren't stupid or evil. They just see things differently.

OK, I'm done venting now.

That is an excellent analogy. I find the more I read about the situation, the more I realize what I don't know. It is far more complicated than just about anyone can understand. I think the bailout was needed but that doesn't mean I am happy about it. I think the bigger problem at the moment is the credit crunch for business. So much of the economy depends on those short term loans and the harder they are to get, the more the economy slows.

I do not like McCain's idea of buying the bad mortgages and then refinancing at the new price, it is far too costly. However, I think it is perfectly reasonable to renegotiate the mortgages so people can stay in their homes and pay a mortgage. It is far better for America in general to have the mortgages redone than to have empty foreclosed homes sitting in neighborhoods across the country.

 

[Stacerita]

The apple analogy explains it in a way most people could understand.

 

[ntsammy5]

Now if you can come up with an analogy to explain credit derivatives I'll really be impressed!

 

[wilderness01]

Nice post OP.

 

[Took]

A good post, OP. I'm not certain if the apple analogy is completely valid (since, as you note, the stock market is complex), but it works okay. The comments on the Bush administration's role in the banking issues is equally valid, as is your point about low-income loans not being the problem (how could they be--they were for comparitively little money).

Go ahead and "vent" if you vent this intelligently!

took

 

[corndog]

If the apples were worth $10, why was the store selling them for $1 each?

 

[binny]

nicely done thank you.

I, too, get frustrated. I am certainly not the most knowledgeable but I do try to keep up with what is going on in the world. I also try to teach my kids The basics. I was carpooling today when I mentioned to my son that the Dow had climbed 900+ today and the Th grader that was with us said "what is the Dow?"

 

[beckmrk04]

Get a grip people. These problems are complex. There is no simple solution. Neither Obama not McCain has any trick up their sleeve that will make these problems go away. Quit trying to demonize people. It's not going to help. Vote for the people that you think will do the best job in running our government but also accept the fact that smart, caring people will see things differently than you and vote for others. They aren't stupid or evil. They just see things differently.

Amen!

 

[MarkBarbieri]

If the apples were worth $10, why was the store selling them for $1 each?

When the apples were originally bought, they were worth $1. It was later that they were worth $10. Once again, the intrinsic value of the apple never changed. What changed was what people were willing to buy and sell the apples for. Early on, people who had apples were willing to sell them for $1 and people that wanted to buy them were willing to pay $1.

If you watch stocks being traded, you'll see that there is a "bid" and an "ask" price. People wanting to buy the stock submit the "bid" prices and people wanting to sell submit the "ask" prices. When there is a match, a buyer bidding what a seller is asking, the stock is traded and that is the stock's price. The stock price moves up and down and people bid and ask at different prices.

In the long run (getting a bit technical now), the true value of a share of stock is the present value of all future earnings. In the short run, the value of a stock is whatever people are willing to buy and sell it for. As a companies expected future earnings rise or fall, what people are willing to pay for those earnings changes.

It's similar to the real estate market. The value of a home is the shelter and comfort that it provides. The price of the home is how much people are willing to pay for it. When home prices tumble, the homes themselves aren't different. The difference is in how much people are willing to pay for the house.


On another subject, today's petty annoyance is people not understanding percentages. If you own a stock and it drops by 50% and then goes up by 50%, you aren't even. Your stock is worth 25% less than when you bought it. For example, you bought a stock for $100. It dropped 50% to $50 ($100 - $100*0.50). It went up 50% to $75 ($50 + $50*.05). The difference isn't part of conspiracy or a lack of regulation of the math world. The difference is that you calculated the percentage drop on the initial, higher value and the percentage rise on the later, lower value. Why is that so hard for people?

 

[FergieTCat]

I do not like McCain's idea of buying the bad mortgages and then refinancing at the new price, it is far too costly. However, I think it is perfectly reasonable to renegotiate the mortgages so people can stay in their homes and pay a mortgage. It is far better for America in general to have the mortgages redone than to have empty foreclosed homes sitting in neighborhoods across the country.

The only way I'd approve of ANYONE (be they a republican or a democrat) renegotiating a mortgage would be to have the homeowner pay the same amount over a longer period of time. Same money, longer time, lower payments. Anything beyond that (hey, your home is now only worth $250,00 so that's what you have to pay) is completely unfair to any other homeowner who chose to live within his or her means.

OP, do you think your apple analogy also applies to the real estate market? I believe it does, except for the fact that you originally borrowed the $10 to pay for an apple that is now worth $1. When you originally purchased the apple, you were willing to pay $10 for it. How you decided to finance it was your decision, be it subprime or ARM. Why should the government or anyone else give you the $$$ to continue making the payments that you agreed to?

 

[mrsv98]

The only way I'd approve of ANYONE (be they a republican or a democrat) renegotiating a mortgage would be to have the homeowner pay the same amount over a longer period of time. Same money, longer time, lower payments. Anything beyond that (hey, your home is now only worth $250,00 so that's what you have to pay) is completely unfair to any other homeowner who chose to live within his or her means.

ITA, refinance with a lower APR and/or longer period of time but McCain's idea of buying the mortgages and then refinancing at the current value is galling.