Calm amid Stormy Markets

Some of the comments proffered this week amid the market upheaval have been interesting. Some have even said, "this is it, the beginning of the end of all things." Surely we are in tumultuous times and there is a commotion about the capital markets, but it is not the beginning of the end of all things. There can be calm amid the stormy markets, if we have perspective and are sufficiently prepared.

The global capital markets have provided an interesting and even scary ride this past week. Market upheavals are never fun, nor are they sought for events. Even so, given the nature of man, market upheavals are necessary events in our domestic and global societies. Market corrections are necessary because we tend to push the envelope and reach beyond reasoned bounds. To many this week has been revelatory and has exposed the excesses in our capital market society. Some have said that this past week was like unto the depression of 1929, really? Yes, we have been here before, and we will be here again - such is the nature of markets. You only get hurt on a roller coaster if you jump off. As scary as the ride may be, we usually arrive safely where we began. The rule in market corrections is not to jump off and endure the ride.

In spite of these corrections, our markets and economies are fundamentally strong. Foundationally, they are built on correct free market and economic principles, proven and tested over time. Notwithstanding, the US Treasury can meet its measure by needed intercession to restore market confidence if the corrections are perceived as potentially irreparable. In its bailout of AIG, the Treasury acted appropriately. The shareholders and management of AIG will bear the consequence of their folly, but given the security and equity interests taken, liquidity restored and markets stabilized the Treasury (US taxpayers) will benefit handsomely when AIG is repatriated in the free market.

I can recall in the mid 70's when mortgage rates were at 15%, overnight bank rates exceeded 20%, the 20 year Treasury Note hit 9%, the DJIA was around 600 (it is now 11,400), the government stepped in an bailed out Chrysler with $1.2 billion in loan guaranties, and many thought we were doomed. Many thought the Chrysler bailout was a failed policy in spite of the nearly $500 million in profit to the Treasury in later years. The policy wasn't a failed policy as it restored confidence in the markets. The failed policy was the auto industry's unwillingness to change its much needed business strategy, thinking it could continue business as usual. Again in the 1980's we faced the S&L crisis which cost the nation dearly. The government bail out the S&L industry, again, was critical in restoring market confidence. Even so, what did we learn? Very little. The unfortunate consequence of past corrections is always reflected in future events. Corrections reset the bar but have done little to change the underpinning nature of the players. Hopefully, this correction will cause us to learn from our errant behaviors, although unlikely.

Surely, we will see future corrections, and most likely more often. Therefore, it is incumbent upon all to be measured, reasoned and conservative in our financial houses - not reaching beyond our capacities and setting our storehouses in order to better enable our enduring of the storms ahead. We must limit our personal debts, set aside capital reserves, improve the depth of our food stores and live with prudence and within our means. We have been counseled by prophets in these latter days to be provident in our living and to build our storehouses, for tumultuous times are coming. This past week sufficiently illustrates the point.