Stolen Milk, Free Milk or Clean Milk

There has been a lot of talk about the issues surrounding the financial markets, banks, Federal Reserve, Treasury Department, Congress and the White House about the “unprecedented times” that we are living in. Everyone seems to have an opinion as to whether the government should have done the $700 Billion “bailout.”

The main argument seems to stem from the question “how did we get into this mess?”  Well, we will resist getting into a political discussion because it seems that the Democrats are blaming the Republicans and the Republicans are pointing the finger right back at the Democrats.  The truth is that everyone shoulders some of the blame.

If you are familiar with our writings, you will know that we speak to issues from a Macro economic level, as that is the only intelligent way to be a successful, long-term investor.

There have been areas of the financial arena that are not being regulated properly.  However, there were also “people who fell asleep at the switch.”  The beautiful thing about capitalism is that it requires both the free markets to determine prices and oversight to assure transparency in the free market’s transactions.

The main reason for oversight is transparency.  The main reason for transparency is for a fair pricing of products and services.

Choices, Choices

For example, I would prefer to have milk brought to my house for free, but only if it arrives fresh and in a timely manner.  With no real chance of that happening, I only have a few other options.  I could steal the milk directly from the cow - ignoring the cleanliness factor - until, of course, I got caught and had to be punished or I got sick.  The other option would be to go to the grocery store and buy the milk, where I don’t have to worry about getting it in a timely fashion or having it be tainted or “toxic.”  Because the USDA oversees and regulates the processing of milk, grocery store owners are able to set up a safe market between sellers (dairy farmers) and buyers (me, because I like clean, fresh milk in my Cheerios!).

This example helps provide an explanation as to the finacial circumstances we find ourselves in now.  There have been financial products that have not been fully disclosed to the public, and this is a problem.  However, the “regulators” have known about this problem for some time and no individual, group or political party, was able to step forward and make/cause the necessary changes.

The answer to the current financial circumstances: Balance!  To let the free markets run their course by themselves is to welcome chaos, cheating, scandal, continued lack of disclosure and greed.  To allow the government to set prices and control the market welcomes a very harsh form of socialism that leads to a “controlled and planned economy.”  A “controlled and planned” economy leads to a lack of profit motive, recessions and, ultimately, a depression.

Psych 101

The free market is an economy’s “Id.”  According to psychology, the “Id” is a person’s inner most desires.  If the “Id” is not kept in check, the person lives out his/her deepest and darkest desires, not caring who he/she tramples over in the process.

The “Super Ego” is an economy’s Super Cop.  The “Super Ego” regulates the mind to always do what is fair, right or potentially, nothing at all, in fear of harming someone or something.

The “Ego” is where the wars between the Id (free markets) and the Super Ego (government regulations) are waged.  It is ultimately where decisions are made.

The Ego is capitalism.  And capitalism only works properly if there are open, transparent exchanges where securities are bought and sold, with prices being set based solely on what a willing seller will sell the securities for and what a willing buyer will pay for the securities.

The $700 Billion Will Help - If We Let It

One of the main purposes for the $700 Billion “bailout” plan is for the government, specifically the Treasury Department, to provide an exchange for transparency for the so-called “toxic assets” to be bought and sold.  Because of the Super Ego, the toxic assets are going to be cleaned out of the system.  Because of the Id, the prices of these toxic assets are going to be set according to market forces.  Because of the Ego, we will (hopefully) find a balance that will allow American, and Global, Capitalism to once again prosper.  (It was because of too strong of a Super Ego that the Great Depression lasted as long as it did, but that’s a discussion for another day).

Capitalism is working right now, regardless of what the politicians running for president, or any other political position, are saying.  In order for Capitalism to work, there must be periods of expansion and periods of contraction, it is the natural order of capitalism - and life. We can not be afraid of this.

We have used the following example before, but it continues to be the best example for the circumstances that we face as a country - and as a world.  Our economy and financial markets are experiencing a tremendous forest fire.  Once the dead plants, trees and underbrush (toxic assets, lack of disclosure) are purged, the forest will come back stronger and more plush than it ever was before.

We must continue to strive to find the balance between our economy’s Id and Super Ego.  Our leaders must not allow the free markets to run wild just as our leaders must maintain the discipline to not try to control the economy.  We don’t want stolen milk.  We don’t want free milk.  We want clean milk.

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