A Partial Solution To Our Financial Crisis

This may be the most important post I have ever written. Even though I was a real estate agent during the times when lenders were making sub-prime loans and the real estate market was out of control, I readily admit that I do not fully understand what is causing our nation’s financial crisis. And until now I thought one had to be an economist to form an opinion as to the actions that should be taken to resolve the situation. I hear amounts like $700 billion bandied about and I simply cannot relate. I mean, $700 billion! I can’t even conceive of that much money.

Fortunately my friend, G.W. Meadows, took the time to research this issue and summarize his conclusions in an email. His thoughts are worth passing along. PLEASE take the time to read his email (below) and listen to the brief talk show audio clip, which features an interview with financial guru Dave Ramsey, whose syndicated radio program is heard by more than three million listeners each week:

To my friends,
Please take the two minutes needed to finish my email. It’s not a forwarded “copy and pasted” email. These are my own written words – some are gathered from media sources, but I put this email together myself. I am not one to ask other people to get involved with things that I believe are important politically because I know that I certainly don’t have the answers to much. This is not a political message. It’s an American citizen message.

I have to tell you that I think that it’s important for us to let our opinions be known to the people who are about to make the decisions on bailing out these financial institutions by loaning OUR money to the tune of 700 billion dollars. When all of this financial crisis info got intense in the national news, I decided it was time for me to find out for myself (not just get my info from the big news channels) what was going on.

I turned to my financial guru, Dave Ramsey. I listened to his quick simple rundown and his opinion of what to do about it. Once I decided to contact my Senators and Congressman by email, it took me a total of eight minutes to get my view to them. I streamlined it and made it even simple for you to do this IF you agree with my opinion (the same as Dave Ramsey’s opinion). I don’t want to convince you of anything. Rather, if you’re like me (and most Americans) you don’t know enough to form a complete opinion.

First of all, listen to Dave Ramsey’s simple breakdown of what’s going on:
Dave Ramsey on the Financial Bailout

After listening, if you think you can spare eight minutes to try to keep your government from overspending your money, then follow the simple instructions below.

Find your Senators by clicking HERE and follow the links to send them an email form.

Find your Representative by clicking HERE and doing the same thing.

In both of these cases, copy and paste the following message into the email/contact forms:

Change the mark-to-market accounting law and extend insurance but extend no loans. If you extend loans – if you borrow the money on the national debt in order for us to all go into the mortgage business to the tune of a trillion dollars I’m going to vote to send you home.

(as Dave said in the audio link above, this is already on the table in Washington and they’ll know what it means; you’re just not likely to hear it on the nightly news. It’s not a new and ‘unheard of’ concept to your Congressmen.)

A lot of crap that government does affects us in small ways. Of course all those small ways add up – but this is a BIG deal. Please form your own opinion. I’m not trying to convince you of anything, but if you’ve wondered what you can do about this mess, this is an opportunity for you to use your voice.

Thanks for taking the time to read this.

After listening to the audio clip, a light bulb went off in my brain. I use Quicken to track my finances and one of the things the software can do is keep track of my net worth. However, I have to make sure that the value of my assets is entered correctly for that net worth figure to be accurate.

When I bought a new car a couple of years ago, I added the car to my balance sheet as an asset. At that time, allowing for instant depreciation the moment I drove it off the lot, I valued it at about 85% of the purchase price. Now two years later, my car is no longer worth 85% of the purchase price, so before generating a net worth report, I have to check the current Blue Book value for the car and decrease the value of that asset.

When real estate was appreciating, I had to adjust the value of my house upward; if I still owned my home in this depreciating market, I would have to adjust the value downward as it declined. If I don’t do these simple things, I am not following good accounting practices and the values I see on the report are not indicative of my true net worth. This is what happened with Enron, Adelphia, and WorldCom – they never devalued their assets as they depreciated and thus the net worth shown on their balance sheets were wildly inflated.

The second point I want to discuss is whether we should let the financial institutions crash and burn or bail them out. I can use the example of the effect of a single foreclosure on the market as a whole to illustrate why I think we should seriously pursue Ramsey’s suggestion. When a house is listed for sale, a real estate agent prices the property by looking at comparable sales (comps) and comparing the amenities of the house to be sold with the house that was recently sold. Appraisers use a similar process when they are hired by the lenders to provide an opinion as to the value of a property. In a normal market, whether appreciating or depreciating, this process, although not an exact science, works pretty well. But in a market such as this one, foreclosures can throw a serious kink into the process.

Foreclosures are always distress sales. Regardless of whether the property is sold by the owner just ahead of foreclosure, or by the lender after they have taken back the property, the goal is to get rid of the property quickly, and that always results in a price lower than the actual value. Once this happens, the next person in the neighborhood wishing to sell will find that the value of their home has decreased because the previous sale must be used as a comp. Just a few foreclosures can start a downward spiral in prices that has little correlation to the actual value of a property.

On a larger scale, this is what is occurring with the financial institutions, but for different reasons. Long time banking regulations require that lending institutions maintain a certain ratio of assets to liabilities. New banking regulations put in place after the Enron debacle require lending institutions to report the ‘market value’ of their assets each day. As their assets decline in value they are forced to sell them in order to maintain the required ‘ratio.’ When they are unable to find buyers for their assets at a price that reflects their true value, they must again devalue those assets and the problem just keeps getting worse.

Does it stick in my craw that our tax dollars would be used to bail out these financial institutions that are in this situation because of their own greed? Yes, of course. But if we do not bail them out, it is the little person who will be hurt. The value of our personal assets are inextricably tied to the values of the assets of the big boys. If we don’t find some way to stop this vicious cycle, we are destined for a lengthy recession that we can ill afford. Ramsey’s suggestions make great sense to me. Paying $40 billion in insurance guarantees to back the loans makes a whole lot more sense than paying $700 million to take over the institutions and directly acquire the debt.