Winners and Losers

It is very easy to consider the free market as nothing but a vehicle to decide winners and losers. However, it is more than that. It is a vehicle to restore order and balance, insuring that the fundamental principles of economics are obeyed.

In the events of the past weeks, we have seen stalwarts such as Merrill Lynch and Co., Lehman Brothers, Bear Sterns, Freddie Mac and Fannie Mae all begin to fade into obscurity.

As this is the political silly season in the U.S., politicians are quick to point blame at each other, some of which is well deserved. However, the current troubles are the result of violating basic economic principles. Yes, I repeated the phrase, because it bears repeating.

Companies in the U.S. can safely take on debt (leverage), if their cash flow permits it. Additionally, debt can be used to lessen taxes. However, with debt comes risk. Failure to properly evaluate risk can result in being over leveraged and unable to pay back the debt. That is exactly what we have seen in this current economic situation.

Individuals took out mortgages well in excess of their ability to pay. These mortgages were bundled, chopped into pieces (tranches), and sold. Lehman, Merrill, etc., bought these seemingly low-risk securities and then used them as collateral for new debt. In both the individual and corporate cases, they were over-leveraged. People have been missing mortgage payments. The tranches with bad mortgages have lost value. That value which was used as collateral is now insufficient to pay back corporate loans. Badda bing, badda boom, companies go out of business.

Let this be a lesson, conservative risk management rewards in the long run. Bank of America, JPMorgan and Goldman Sachs, while taking it on the chin in the short run, are well positioned to weather this storm. The market is correcting the excesses and that's exactly what it is supposed to do.

Electric Car Finds its Niche

In a brutally honest (and refreshing) piece in Reuters, titled "Electric cars -- It's the economy, stupid!" the author gives a real-world assessment of her Reva G-Wiz, pictured on the left. Guess what, it isn't all pretty, but that's not why I like the article.

The author purchased the car to be able to drive in London and avoid the congestion tax, as well as the $9 a gallon gasoline, and also take advantage of free parking. To that I say, "Good for you!" She wisely identified that her objective was to have self-determination in transportation and a cost that suited her budget.

From the article, "...I set up a spread sheet when I bought the car and I fill in the savings I make on the congestion charge, estimated on petrol and on parking... I sold my old car and I have now "made back" the expenditure on the G-Wiz through these savings... I "paid off" the car in March this year and am on the way to "paying off" the total amount."

So what' the catch? The car go only go about 40 miles per charge. Additionally, that 40 miles is really only in mild weather on flat roads. It has poor acceleration and is very small. The author also stated that going up hills was like riding a bicycle.

What this article really is about is choice, and that's what I like about the article. The consumer had a choice of the beefier car, but was faced with congestion tax, parking fees, and very expensive gas. She chose an alternative which saved her money and suited her needs. Long live the free market!!

Enjoy this Jeremy Clarkson ( of the BBC's Top Gear) video of his take on the G-Wiz. It is in about 2 minutes or so. He takes those two minutes to mock the French.

The Free Market Strikes Again!

The free market has struck again! According to a press release from the US Department of Transportation, "Americans Drove 1.4 Billion Fewer Highway Miles in April of 2008 than in April 2007 While Fuel Prices and Transit Ridership Are Both on the Rise."

While one may view this news as good or bad, here is what the US government is really concerned about, taxes!

“We’re burning less fuel as energy costs change driving patterns, steer people toward more fuel efficient vehicles and encourage more to use transit. Which is exactly why we need a more effective funding source than the gas tax,” Secretary Peters said."

So, which is it, drive more fuel efficient cars and take the bus, or drive Hummers and pay more in gas tax?? While I think reducing taxation is great and should be done more often, I am not fool enough to think crumbling roads and bridges are a good thing.

As the title mentions, the free market will decide these things. Folks will drive less and change other gas-influenced behaviors as the costs increase, and more than likely, find ways to pay less in taxes, if given the choice. I guess we will have to wait and see.