Sunday, September 28th, 2008
Barron’s posted an excellent article this weekend on why the wall street bailout is a good thing (subscription may be required) for the government and taxpayers. Why? The markets & public have assumed that the mortgage-backed securities the government will purchase are far worse than they actually are. In fact, most are senior “tranches” of loan portfolios (higher quality & lower risk), which means less senior slices will absorb any losses first. Even assuming very high rates of default and low foreclosure recovery rates for these loan portfolios, the government could very possibly enjoy a 7-8% return on their investment!
Further, the bailout will help free up capital in the credit markets, boost prices of mortgage-backed securities to a level reflecting reality, and (most importantly) stop the continued decline in housing prices.
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Barrons.com
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Saturday, September 20th, 2008
Much has been made of the disaster surrounding subprime lending and the subsequent government bailouts of large institutions such as AIG. The media has done an adequate job of scaring the masses to death, and many will do (as is human nature) the wrong thing and exit the markets licking their wounds.
However, if you can, stay the course and tune out the media. Why? History has shown that the government has always stepped in to correct large scale financial problems. Don’t believe me? Give this Wall Street Journal article on government bailouts a quick read (may require subscription).
The bottom line: the US continues to be a premier player in the world economy. Markets boom and bust (and will continue to do so) but as a significant world power we are relatively young. Sure, things will be a little tougher for a while - but keep your eyes on the horizon as US stocks are still the place to be in the long run.
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