2008 Fate

And here it is. A new year in name only, but leaving us exactly where we were at the end of last year, sitting on the edge of financial meltdown and trying to calculate who out there is hiding the largest losses and whether a good portion of America will be homeless, jobless, or at minimum, not buying so much at the local mall.

The governments (and their sovereign funds) are working hard to provide liquidity into the system to keep things afloat, and this altruistic bent has apparently trickled down into the minds of those running Bank of America, deciding last week to toss a lifeline to Countrywide via a $4 billion bailout. One can make arguments for and against this transaction, but one can also assume that Americans will always opt for living in a house rather than a cardboard box, so going in this direction makes sense if you are BofA and can dominate the market.

As the Fed considers its next rate cut (the mechanics of how much, not if), there is probably but one question that most investors or speculators should be asking and that is whether the financial and housing sectors have hit bottom.

The difficult thing to do now when things are erratic is to take one's hard earned cash and load up on the stocks of banks and brokerage firms. My guess is as good as anyone's and working at a call center does not afford me great wisdom. It seems like excesses are being rung out at a rather incremental pace, and with no drop in the availability of low cost cash from federal sources.

The problem of a government sponsored high liquidity environment combined with the general greed of certain homebuyers, mortgage brokers, and investment banks is not resolved by maintaining the incentive (low rates) that encouraged the bad lending practices in the first place. It is imperative that lending laws reflect necessary changes too or the take the money and be foolish environment will continue. You don't do breast reconstruction surgery on one breast and call it a done deal, and the government is playing the one eyed reconstructionist.

Barring surprises, I am willing to bet that a Democrat will win the November election.

I am also willing to bet that the winning Democrat, either Obama or Hillary, will be trying hard to 1) actually deliver on massive healthcare reform and 2) prove that electing Democrats is good for the financial/fiscal health of the nation. That desire to please the base (with health care reform) and confound the naysayers (by reviving a fallen economy), will probably deliver a great boost to the average citizen's mental comfort zone.

Republicans and various other conservative types will howl about the dangers of placing healthcare in the hands of the government, but enough people seem turned off to the idea of just tinkering around the edges of healthcare reform and fundamentally changing nothing.

While not being overly enthusiastic about expanding the role of government in life, I am also not reality challenged enough to believe that the private sector provides the ultimate example of expertise (in anything) over the years: savings and loan, dot.com, LTCM, airline industry, auto industry, mortgage lending, and so on.

When that Democrat that I probably won't be voting for (but will welcome anyway) gets elected, and if he succeeds at bringing some level of simplicity, order, and cost reduction to the healthcare process, millions of citizens will have a level of daily psychological comfort that they don't know they need. (But I know they need it, so don't quibble).

That will bode well for the economy, when it happens. And before that happens, financial and housing stocks will recover.

One caveat is the impact of the current crisis on state budgets. The pain from budget reductions may roll out slowly like a cancer, so we are unlikely to see any improvement any time soon.