Wednesday, November 19, 2008

Market Theory Works

Economics is tough. Recently it has been broadcast that 1.2 million jobs have been lost this year. A large number of those jobs have been in construction and industry. However I do not know the statistics but I would venture the largest number of layoffs are in the service sector. Banks and financial institutions have laid of tens of thousands, insurance companies are shedding workers, real estate agencies and other mortgage brokers have to be losing people. I cannot help but wonder how many of those jobs were created with poor supporting structure.

What do I mean by that? Stop and think about it, here were these huge financial institutions putting together investment instruments containing thousands of mortgage and reselling them to investors for large fees, yet in their technological sophistication they cannot tell you what instruments lie bundled in these portfolios. as a result when the value of the bundles comes into question they have no way of sorting out the bad so the entire bundle of mortgages is devalued, perhaps way below market value.

Home prices are falling in many parts of the country. Why, because greedy people bought homes paying premium prices with little regard for real market value creating an artificial market value not supported by sound credit terms and traditional methods of measuring property value. Instead it became similar to a pyramid scheme and as long as no one asked any questions people were getting rich. However, they were also pricing the properties beyond the range of the average person thereby narrowing the number of participants in the market until it became unsustainable.

What we are seeing now is a period of adjustment, and quite frankly we need these downturn to put rationale back into the markets. Unfortunately some innocent people are going to get burned, and some shortsighted greedy people rewarded. But then, who said life was fair?

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