Major Financial Institutions Failing: So What?
Posted on September 11, 2008
First there was Bear. Then Fannie and Freddie. Now possibly Lehman will fail. But the key question, I keep asking myself, is: So What?
Has the economy really been damaged by the failure of any of these firms. The answer is: No. Will the economy be damaged by more failures. The answer, again, despite the marketing by biased financial institutions and the Fed is, I believe: No. In fact, these firms should be allowed to fail as quickly as possible, so the economy can get back to creating, producing and selling products/services that are actually needed by society.
The major US financial institutions have long ago ceased to provide any product/service that is actually in demand or needed in society. Even simple mortgages, and especially mortgage-backed securities, are not essential to a fully functioning real estate market (see below for a brief explanation).
Of course, there is a need for basic banking services in an economy, but major US financial institutions, and especially the investment banks, hedge funds etc. have not really been focused on “true” banking business, for quite some time. Instead, they are in the business of selling, marketing, and trading what amounts to worthless paper. Society does not really need what they sell. As such, should these firms completely disappear the US and world economy would be no worse off. Quite a few paper billionaires, make become mere millionaires, but should that really concern society?
I’d be more worried, if a company, like Microsoft or Google, was on the brink of failure, since they produce products that are needed and demanded by society. Then again, even if they failed, it would not be much of a worry, since there are plenty of smart entrepreneurs who could fill the void and recreate the products.
Basically, as long as there are companies, and most importantly hard-working people, in an economy, which create and supply products/services that are needed and in demand, an economy can continue to grow and flourish. Naturally, without major banks peddling worthless securities, many companies would fail, since due to the paper ponzi scheme developed by Wall Street, many businesses are not run to produce profit, but rather to sell securities. However, there are millions of businesses that are run for profit, and that sell needed products/services and these companies would continue to flourish.
Getting to investment strategy: as long as the companies you invest in provide needed products/services and do not need continued financing, you should not be worried by the current sell off (assuming of course you do not buy on margin and are diversified). The values of these companies, even considering major fluctuations, will be mostly retained over time, since they sell something that is needed and, presumably, can do so at a profit.
On the Mortgage Market: Quick Take
Interestingly, if the mortgage market completely disappeared, society would still function and people would still buy real estate. Need proof of that: Consider traveling to other countries, like Brazil, where the vast majority of real estate transactions are and have always been conducted in cash. Of course, without a mortgage market, real estate prices would plummet further, since few can afford current prices in cash. But, still the market would function perfectly normally and over time it would eventually recover and go higher due to steady demand from population growth.
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