THE 700 BILLION DOLLAR

 Stephen Meidah

My phone rang and a frantic client asked, "What is this 700 billion dollar bailout mean and what is it going to do to my investments?"

The answer that Warren Buffett gave on CNBC the morning of Sept. 24, 2008 makes sense to me. The bottom line? The bailout is necessary and will probably end up making money.

This answer surprises most people and here is the reason. First, the word "bailout" creates the wrong mental picture. Bailout sounds as if the government is going to dip into an existing pool of money, thereby depleting our resources, then give it to individual Wall Street firms as a business grant. This is not what is happening.

The 700 billion dollars is not an expenditure at all, it is instead an investment for asset acquisition. The money will be used to purchase existing assets at currently depressed prices and later sell those assets at higher prices. This is why Warren Buffett said on CNBC that he wished he personally held the cash to do this for himself. Only the government, however, has enough capital to do this deal. The deal, however, is attractive as a pure investment.

Why? The assets being purchased are mortgage bonds. Again, commentators and congressman make it sound as if we will purchase individual mortgages that are currently in foreclosure. Not true. The bonds are large pools of currently performing mortgages with only the usual risk of any particular one mortgage defaulting. No one is talking about the average default rate, which only hovers around 2.5%. We only hear of the percentage increase in defaults over the last reporting period which makes the foreclosure problem sound much worse than is actually the case. The truth is that the vast majority of these mortgage bonds are functioning well and only a very small percentage will ever default.

No one is bailing out fat cats on Wall Street, as it is often represented. The capital influx is actually going to bailout the average guy on Main Street, if it can be considered a bailout at all. Most people are blissfully unaware that Wall Street is merely the vehicle for everything that any one individual does with his or her credit card, car loan, house payment and ATM card. The so-called Wall Street fat cat only makes it possible for the average person to do the regular business of daily shopping and living.

If we fail to make this $700 billion investment now, thereby creating a market for these mortgage bonds, then the potential price of the true bailout in the future will be a second depression. People will not be able to use credit cards, buy cars or get mortgages. Since businesses will not be able to borrow, the same people complaining about the bailout now will still be complaining, but with the exception that they will then be unemployed. If you think people can't pay their mortgage now, watch what happens when the unemployment rate goes to 20% because their employers can't access credit to run their companies. When this happens employers must let people go. There is simply no choice.

The economy is like the mobile on my grandmother's front porch. When the wind blows it's not just one chime that moves. They all move. We all live in a credit culture that is now saturated. The average person cannot live without the Wall Street guy that he or she criticizes. We are all interconnected. The ATM won't work, credit cards won't work, car dealers won't work and certainly mortgages won't work unless Wall Street works. This is the harsh economic reality of our current credit culture.

This crisis is not fun and a $700 billion plan, whether seen as a bailout or an investment, is an obnoxious necessity either way. But, it is necessary. Not acting now, as difficult a pill as it is to swallow, will create an unimaginable future crisis. Warren Buffett is right. Swallow this pill now. The future disease without taking this current medicine may be deadly.

For further information concerning investments, pensions or retirement please read Steve Meidahl's highly regarded book, "Lessons Of A Real Life Investment Advisor" or visit Stephen O Meidahl's website at http://www.smeidahl.com Article Source: http://EzineArticles.com/?expert=Stephen_Meidahl