{"id":73,"date":"2009-01-22T10:02:00","date_gmt":"2009-01-22T15:02:00","guid":{"rendered":"http:\/\/www.intuitiveinvestor.com\/web\/?p=73"},"modified":"2018-08-23T14:21:59","modified_gmt":"2018-08-23T18:21:59","slug":"reader-of-wall-street-journal-asks","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2009\/01\/22\/reader-of-wall-street-journal-asks\/","title":{"rendered":"Reader of Wall Street Journal asks…"},"content":{"rendered":"

For today’s post I wanted to copy for you a question asked by a Wall Street Journal reader in their “Journal Community” section. The questioner is named Hector Caaballo<\/span> and he asks:<\/span><\/p>\n

“I don’t get it. Day to day life has seemed to change little for the average American, but the financial markets are in an upheaval. I hear that ninety percent of homeowners pay their mortgage. And the crisis is due to falling real estate prices and loan defaults. huh? How can ten percent of homeowners spin the economy into such a dramatic tailspin? It just doesn’t add up. I wish someone could help a layman make sense of this mess. I have been reading the WSJ<\/span> and watching CNBC<\/span> trying to have a true understanding. It still doesn’t add up. Listening to Secretary Paulson’s<\/span> testimony today to the Senate Banking Committee I was even more concerned. It seemed even the smartest guys in the room had a tough task of simplifying the information in a manner even Senators could understand. I have learned that a sign of mastery over information is the ability to explain it using simple concepts. Repeatedly stating that “its complex” is, in my mind, code for: I still haven’t figured this out myself. I feel like the American people are being asked to take a leap of faith. It would be better to understand and move from a base of comprehension rather than blind faith or fear. Am I alone here? Help me understand this better, please.”<\/span><\/p>\n

As you can tell Mr. Caaballo’s<\/span> question was posted some time ago as he references former Treasury Secretary Paulson<\/span>. Anyway, the point of today’s post is to respond to Mr. Caaballo<\/span> and say:<\/span><\/p>\n

I don’t understand the tailspin of the financial markets either. No rational answer can be provided to explain the massive (seemingly) overreaction to the Crisis<\/em>. The only explanation that seems to account for all of the facts is that all sorts of people, from businesspeople to the Average Jane, have overextended themselves financially for too long. These folks and financial institutions were living with very little room for error and as if the perfect conditions of a massive credit bubble were<\/span> going to continue forever.<\/span><\/p>\n

The problem with debt, which is the source of all of this mess, is that you have to make regular payments irregardless of your current financial situation. That, of course, requires cash to be on hand. If you have invested all of the debt monies you have accumulated in illiquid assets then you are in a pickle. This would not be a problem if only a small percentage of businesses and individuals in the economy had engaged in this type of behavior. The problem started because there was a massive structure of interlacing co-dependant relationships in place. As long as there was someone out there willing to put new liquidity into the system then a new house or building could be built in the hopes that a rent or capital could eventually be collected, damn whether or not there really was someone specific to fulfill that role. That made both the bank that lent the money originally, or the financial institution that eventually bought the loan, as well as the developer all dependent on cash coming from some source. If the cash dries up, say due to a massive financial market panic and everyone makes a run for the exits, then you have a problem. Does this make sense?<\/span><\/p>\n

OK, but do you see the problem with this whole situation; and do you see why Mr. Caaballo<\/span> and I are so confused? Logically, all of these problems should go away if cash returns to the financial markets. So why isn’t there more cash returning to the markets? Because we are dealing with human beings, not machines, and people are scared. The massive problem is that their fear is a self-fulfilling prophecy. They are afraid that they won’t get their money back if they invest it because things are scary and they might lose it, so they don’t invest it and it causes more financial institutions to fail which begets more fear. Etc. Ad nauseum<\/span>. So what can be done to reverse this downward doom-laden spiral? As regular readers of this ‘ittle<\/span> blog know, I have made numerous suggestions for how to restore trust. If you agree with this line of thinking then I would love to see some comments in the comments section as to how you feel confidence can be restored. [By the way, this is not a shameless plug for the comments section.] I know some of my regular readers and know that you are smart, smart people and I would looooooove<\/span> to hear your thoughts.<\/span><\/p>\n

Big smile to everyone!<\/span><\/p>\n

Jason<\/span><\/p>\n

PS – I am sure you have seen the ridiculous stock market gyrations, yes? Pay no attention to them. Instead pay attention to specific news about structural issues, like the bailout plan, changes being implemented at financial institutions, etc. Are those folks doing the right things?<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

For today’s post I wanted to copy for you a question asked by a Wall Street Journal reader in their “Journal Community” section. The questioner is named Hector Caaballo and he asks: “I don’t get it. Day to day life has seemed to change little for the average American, but the financial markets are in […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[],"class_list":["post-73","post","type-post","status-publish","format-standard","hentry","category-the-blog"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/73","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=73"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/73\/revisions"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=73"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=73"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=73"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}