Stock Market Meltdowns - Why they will happen again and again and again

Lobbying works on two fronts. First, is the appeal to public welfare. In the 1980's the interests in favor of creating Fannie Mae appealed to the dream of home ownership and the idea of making homes more affordable. They convinced Congress that a quasi-public company would make interest rates cheaper and housing more affordable ( in the short run this is true, since with implicit government backing, they could borrow more cheaply). Later in the 1990's Fanne Mae convinced Congress that in the goal of opening up home ownership to more people, they should lower the down payment requirements. Again, there is the appeal to helping the poor achieve the American dream.

Of course, the lobbyists are also looking out for their own self-interest. Lowering the down payment requirements would help them sell more loans and make more money. Perhaps the lobbyists were being cynical about the benefits to the poor. Or perhaps they believed their own marketing and genuinely believed it was win-win. It doesn't matter, the effect is the same.

The second part of lobbying is the campaign contributions and the golf games. This provides the Congressman the personal incentive to support the lobbyists' plan. Most of this happens right out in the open - the days of passing around suit cases full of cash are over (although if you want to read about those times check out Caro's Master of the Senate). The amount of the contributions is not enormous, but in an election every bit helps. It's enough money that the Congressman will try to find away to help the lobbyist if he can.

The end result is disastrous. By having the implicit government backing and by lowering the down payment requirements, Fannie Mae was able to make massive number of irresponsible loans Its managers made tens of millions. Then the whole thing crashed and the taxpayer is now footed with part of the bill. But no Congressman will pay any price for the debacle, so they never learn the lesson. Most voters won't even know who is responsible. And the general voting public has no ability to vote out the members of the banking committee - voters can only vote out the member of their own district. Of course the voters of that particular district don't want to vote their particular Congressman out. If they did, they would lose the earmarks that come from having a senior Congressman. Thus, there ends up being no accountability. Congress ends up with a 98% reelection rate and a 20% approval rating.

For the Congressmen involved, it is just a case of good intentions gone awry. In fact, I actually think Congressmen genuinely believed they were doing the right thing when they created Fannie Mae. Righteousness has an amazing ability to align itself with self-interest.

I find it amusing when people subscribe to the "throw the bums out" theory of politics. If you've every worked in Washington, you realize that the people running the show are generally no worse than anyone else in the country. Most are pretty decent, a few are rotten. The real problem is the incentive structure of our current political system. The only solution to fixing Washington is major Constitutional reform.

He did teach me that entrepreneurship is a lifelong pursuit.

If you do not believe you can time the market though, then being 100% cash is as bad strategy now as at any other time.

I have no evidence to show dividend-bearing stocks outperform their counterparts, but my point is that those counterparts are overvalued. If a company will never be bought, will never pay dividends, and will never wind down operations rather than face bankruptcy, the net present value of its stock is therefore 0.

*http://en.wikipedia.org/wiki/Kong%C5%8D_Gumi

The recent trend is that mature companies are not paying dividends. This trend is new enough that it probably hasn't shown up in performance statistics. But it is very worrisome on a fundamental level. A stock like Yahoo! or Alcatel has little room for its price to grow, thus you can only make a return via dividends. Without dividends, owning it is almost certain to be a losing proposition.

you can say the same for dollar bills. what is a dollar's INTRINSIC value? zero. its just a piece of paper

its totally valid. the economy has only shrunk temporarily on a small number of occasions. the economy is more or less always growing, so it is always smaller in the past. indeed the US suffered a bad depression in the 1870s but pulled through without the Fed

Trivia: Who performed the role of the Fed before there was a Fed?

there wasn't one source. remember bank and state notes?

in any case, prior to the fed, a dollar held its value for decades. post fed, the dollar lost 99% of its value