Jittery markets and helpful government

By Brian Ochsner (baochsner@aol.com) Exactly as Ronald Reagan said, the nine scariest words a small business owner (or investor) can hear is: “I’m from the government, and I’m here to help.” Government ‘helps’ just like a 5-year-old helps his mom make breakfast: the actions may be well-intentioned, but the results aren’t that positive.

The Sarbanes-Oxley regulations for publicly-traded companies are Exhibit A. Next I would mention Fannie Mae and Freddie Mac’s involvement in lessening risk with mortgage lending, along with former Fed chair Alan Greenspan’s lowering of interest rates to all-time lows.

In the aftermath of corporate scandals with companies such as Enron and MCI/WorldCom, Congress felt they had to ‘do something’ to protect investors from unethical companies. But just like the little kid helping mom with a meal, the results were worse than the intentions.

It’s increased compliance costs for publicly-traded companies such as Berkshire Hathaway – Warren Buffet’s firm. In a recent CNBC interview, he mentioned the costs of auditing Berkshire’s 2006 financial statements totaled about $24 million. After Sarbanes-Oxley was signed into law, IPOs (Initial Public Offerings) for companies in the US dried up. A lot of companies went private or did their IPO on a foreign stock exchange where regulations weren’t as onerous.

The government’s ‘help’ in creating the real estate bubble came from Greenspan lowering interest rates to rock-bottom levels and encouraging Americans to take out interest-only loans – also known as ‘option ARMs’ (Adjustable Rate Mortgages). This allowed many homebuyers to finance a home they really shouldn’t have bought in the first place.

When these ARMs re-set after usually two or three years, the payments increased, which resulted in the higher rate of foreclosures in Colorado and around the country. After these risky loans were made, lenders were able to sell a good portion of them to Fannie Mae and Freddie Mac.

They bought the mortgages that were originated with other lenders, such as Washington Mutual and Wells Fargo to lessen the risk to mortgage lenders – especially those in the sub-prime (translated: high-risk borrower) market – and keep the real estate mania/bubble going.

Now Fed Chair Ben Bernanke is calling for Congress to rein in Fannie and Freddie from buying these risky mortgages. This action is too little and way too late. Kind of like closing the barn door when the horse is a mile away.

Government’s ‘help’ increased the value of real estate prices, and kept the economy going for awhile after the dot.com fallout of 2000. Now that the real estate/mortgage market bubble has popped, Wall Street is getting a little nervous. The Dow has gone down triple digits twice in the past two weeks.

The result of this government-sponsored ‘help’ is probably going to be a downturn in the economy over the next few years, maybe even a decade or so. The solution to these challenging times won’t be more government involvement. You should never ask the people that got you into the problem to get you out of it.

Unfortunately, I see more and more Americans looking to government instead of themselves to solve their financial and economic problems. So what do I suggest folks do to prepare themselves?

First of all, learn how to invest – namely, how to read financial statements: the Income Statement, Balance Sheet, and Statement of Cash flows. Look at financial and economic trends throughout history, especially over the past century, not just the past few years.

You could put your money with a financial planner or stock broker and forget about it, but I don’t think that’s a smart way to invest. Frankly, I think most of them are good salespeople, but not necessarily good investors. Their job is to get you – and keep you – in the stock market, not necessarily to maximize the returns on your money.

Next, learn about Austrian economics (not the Keynesian garbage that’s taught in almost all universities), the role of gold and silver as money. You also should learn how to sell and market, and preferably be in business for yourself. Job security is a myth nowadays with global competition for labor, American economic risk and company management risk. Not to mention what happens to jobs when companies are merged or acquired – they usually get cut.

Even with all these financial storm clouds brewing, there are still plenty of opportunities to get ahead financially. Turn off the TV, and take some time to invest in your own financial and economic education. As Louis Pasteur said, “Fortune favors the prepared mind.” This financial preparation will be very important for self-reliant Americans in the years to come.