As usual, in the course of a year a number of issues arise that deserve comment, but not enough to comprise an entire column. Therefore, as we near year's end I offer these brief thoughts on a number of issues we faced in the past year.
First, I wonder what kind of advice those clever financial advisors and writers who encouraged people to keep the mortgages on their homes at maximum, are now giving? Slogans like "put the equity in your home to work for you" and "release your equity for investment" were in common use not many months ago. Mortgage brokers were "selling" refinancing as home values rose so that the equity could be put to use. It sounded a lot like "buy term and invest the difference," a popular concept with financial writers, most of whom are journalists, not economists.
I never bought that idea and instead encouraged people who would listen to make extra principal payments on their mortgage every month. It is so easy in the early years to double or triple monthly principal payments. From personal experience I can tell you that there is nothing quite so satisfying as arriving at retirement without a mortgage on your home.
The bursting of the housing bubble, which also helped bring down the stock market, once again demonstrates that leverage is a sword that cuts both ways. My own belief is that a person's home is the last thing that should be exposed to the risks of leveraged investments. But then we have been through a period when the fruits of speculation have had more appeal than the fruits of labor. It reminds me of the Chinese proverb, "Man must sit with mouth open for long time before roast duck fly in."
In a related way, hedge funds have also contributed to today's economic malaise. They have enabled well-heeled investors to do collectively what they could not do individually; that is, circumvent the margin requirements on investments. Margin requirements were put in place to avoid a disastrous crash like that of 1929. But as noted economist John Kenneth Galbraith observed, "Financial memory lasts only 20 or 30 years." And so, with creative financial products we find ways to violate the spirit of regulation that was put in place to avoid disaster.
On another front, where is the magic in federal regulation? Between 1980 and 1990, 747 federally regulated savings & loan institutes failed at a cost to the government of $124.6 billion. S&L investors lost additional billions and home construction fell to the lowest level since World War II. Sound familiar? Substitute banks and investment banks and it's like reading today's newspaper.
