Chris Tomaras / Straight Talk / October 25, 2008

This week the markets continued to trade based on fear and uncertainty, because nobody really knows how bad things are going to get, before they hopefully get better but for the time being, it seems that we have settled into a historic, high volatility trading range, a perfect scenario for day traders to benefit given the huge, daily point swings that we’re experiencing while we wait to see what’s going to happen.

What I can tell you for sure is that there is no quick fix to our economic problems and there will be continued  pain for an extended period of time. It took a long time to create the problem and it’s going to take a long time to correct the problem.  So, for all Americans, right , wrong or indifferent, it’s now time for a shot of reality.

Instant gratification is not an option given the magnitude of the problems. While people are angry and want the pain to go away, they need to understand that what is currently being done  is merely to stop the bleeding while the patient is being completely diagnosed and correct procedures can be implemented to save the patient’s life before beginning the healing process.  When a person has been seriously injured requiring surgery, they don’t just jump out of bed the next day and everything, is as it was, before the accident. There’s the administration of drugs, therapy and long term rehabilitation and hopefully in the end the patient will fully recover. No matter what, the seriousness of the injury will be a life altering experience for everyone involved. And I can tell you for certain that life on Wall Street will never be the same.

The Federal Reserve and the administration are administering drugs, therapy and rehab in the form of stimulus packages, bailouts including guaranteeing bank deposits and purchasing ownership in banks, all in order to provide liquidity and restore business and consumer confidence. The SEC has also periodically restricted short selling to relieve some of the downward pressure on the stock market. These are some of the ways of trying to stop the market panic, create liquidity and enable the economy to begin to heal.

Now, these corrective measures are totally separate from the culpability of those who caused the problem and that’s an entirely different issue which will take time to investigate. You need to know that the derivative products developed by Wall Street investment banks were meant by design to be low transparency, high profit margin and high volume vehicles, not easily understood by very many people including many Wall Street professionals themselves and that’s the way derivative traders liked it.

I can also tell you that some of the tactics that are being employed to save the economy will eventually be problematic. Often times patients are given a variety of drugs and procedures until they find the one that works, but when you’re dealing with the lesser of two evils, it means exactly that.

We’ve talked about this before but it’s not an easy thing to comprehend  so, for those who still do not understand what has transpired and how we’ve gotten to this point, let me give you a brief explanation. Everyone knows that the mortgage market through the lack of proper oversight and irresponsible lending practices resulted in an unhealthy surge in the demand for houses  and subsequently dramatically rising housing prices. The prices reached levels where houses were way overvalued especially here in Florida. Many of those houses ended up in the hands of borrowers who could not afford them and also a large number of speculators looking to make a quick profit.  Eventually it caught up with us and the supply of houses far exceeded the legitimate demand. Then what followed was a precipitous drop in prices forcing many homeowners into foreclosure and bankruptcy. 

These same mortgages ended up in the hands of banks and thrifts, insurance companies, FNMA, Freddie Mac and Wall Street investment banks. Without going into too much detail suffice it to say many of them were packaged together and sold in the form of securities into investment portfolios at attractive rates of interest all over the world. Since the rates on these mortgage securities were so attractive, it stimulated  very strong investor demand which fueled a vicious cycle with the creation of more and more mortgages to meet the demand and less and less scrutiny over the quality of those mortgages. When the music finally stopped and housing prices declined, the holders of these securities were faced with huge losses causing extreme financial distress. If forced to liquidate their holdings, the pressure on the market would have caused prices to fall even more putting our economy in further jeopardy.  And remember since these mortgage related securities were sold all over the world, if foreign investors decided to liquidate their positions it would seriously exacerbate the situation. Therefore foreign governments are putting tremendous pressure on the US, to do something to stabilize the markets and instill confidence back into the credit system.