Stock Option Advisory

Housing Bubble & Financial Crisis – Who’s to Blame? Part 2 of 3

Because the financial meltdown has happened so close to a presidential election, the partisan spin-masters are working overtime to capture the public’s perception of who is to blame. The Democrats are blaming the Republicans for de-regulation. The Republicans are blaming the Democrats for propping up failing government-sponsored programs. The mortgage industry is blaming consumers for making poor financial decisions. The consumers are blaming the mortgage companies for issuing loans that could not be maintained.

All parties meant well. But, as they say, the road to hell is paved with good intentions. As congressional Democrats continued to prop up Fannie and Freddie, they tried to keep alive a government entity designed to level the playing field of home ownership, but which also brought about gluttony of mortgages that, under normal lending practices, should never have existed. As Republicans pushed for de-regulation of the financial markets, they believed in the ability of the markets to self-regulate, but found that the financial industry would capitalize on it for short-term gain even if it meant long-term peril. As mortgage companies continued to issue questionable loans, legal under the current laws and regulations, they had faith in the continuing appreciation in housing values. And, as consumers signed on to mortgages they couldn’t afford, they too had faith in the continuing appreciation in housing values.

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At the bottom of this mess is one thing: As a nation, we disregarded the power of economic fundamentals. Like a slingshot, we pulled against the natural economic forces until the tension was too great. The market finally snapped under the pressures of bad policy, bad decisions and bad assumptions. Adam Smith’s invisible hand, as portrayed in his book of The Wealth of Nations, has smacked us flush across the face and put is in our place in the form of this financial meltdown. Just like the theory that what goes up must come down, in economics, what moves furthest from economic fundamentals must eventually come back to reality. The further our policies and decisions wander from the economic center, the more violent the eventual market reaction.

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As we ponder the federal bailout package, we are faced with the possibility that, while it might prevent the large-scale failure of our financial system in the short-term, it could also create big problems in the long-term. It is, again, an example of interfering with the natural push and pull of economics. But, when that short-term economic failure becomes too great for the nation to shoulder, we realize that something must be done, even if it is a difficult pill to swallow.

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As we gradually recover from this crisis and get on with our lives, we can use the experience to improve our financial system. We can look back at this situation as an example of what can happen when we lose sight of the fundamentals of borrowing and lending money. Perhaps Democrats and Republicans can work together to find the right balance between regulation and free markets. Maybe consumers will rely less on credit and more on savings and frugality. It could be that the lending institutions will re-evaluate the drive for short-term profits and temper it with the need for long-term sustainability.

Those how have seen their stock portfolios and 401K’s negatively affected during this crisis might consider stock options investing as a way to insure their investments from future stock market shocks. Strategies involving stock options can aid investors in protecting their investments, put options and married put options, for example. Stock options strategies, covered call investing for example, can also be used to generate monthly income.

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[tags] financial, Democrats, Republicans, mortgage, Adam Smith, economics, bailout, 401K, covered call investing, covered call investment strategy, investment strategy, iron condor, poweroptions, stock option trading, stock options [/tags]

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