Editor's note: Our goal with the weekend "Masters Series" is to bring Digest readers the world's best insights on investments, economics, politics, and history... Today's edition comes from our friend and colleague Alex Green...
Alex is the investment director of the Oxford Club, one of the most widely read financial publishers in America. He has more than 25 years' experience as a research analyst, investment advisor, portfolio manager, and financial writer.
At Stansberry & Associates, we've known and worked with Alex for more than 15 years. He's one of brightest investment thinkers in the business. (The exceptional performance of the Oxford Club under his directorship is proof enough.) And he's a talented author. We highly recommend all three of his national best-selling books, The Gone Fishin' Portfolio, The Secret of Shelter Island, and Beyond Wealth: The Road Map to a Rich Life.
In 2007 – nearly five years ago – Alex wrote a controversial piece about the "true" cause and subsequent effects of the U.S. housing bubble. Alex was spot-on in his predictions about how the mess would play out. His ideas may not be popular with many homeowners who lost their shirts to fraudulent lenders and mortgages they couldn't afford. But we guarantee they will make you think…
Financial Freedom: The First Step is Personal Responsibility, Here's Why
By Alex Green, Chairman, Investment U
I caught some flak from a recent column suggesting that, for free markets to work, the government shouldn't be bailing out homeowners who borrowed too aggressively. (Although most of the complainers admitted they were overextended.)
Apparently, Barack Obama now feels their pain. In a Financial Times column, the Democratic presidential contender wrote that lenders were guilty of "pushing," "hoodwinking," and "driving" low-income buyers into mortgages "they could not possibly afford." He proposes a government fund to help millions of borrowers that he calls "victims."
Hmmm. I don't want to let lenders off the hook. Their rock-bottom lending standards are partly to blame for the real estate mess. And those lenders who committed fraud should certainly be prosecuted and punished. (Many, of course, have already seen their livelihood vanish and their share prices plummet.)
But Senator Obama's statement still puzzles me. As Washington Post columnist George Will wrote yesterday:
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How did lenders 'push' these people? Are these 'victims' absolved of personal responsibility simply because they were 'told' they could afford the mortgages? Could you define – and defend punishing – lending that is 'irresponsible' but not fraudulent? |
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The foreclosure rate for so-called 'jumbo' mortgages – those of more than $400,000 – is approximately the same as the rate for subprime mortgages. Are borrowers who seek and receive such large mortgages also blameless 'victims' of being told and driven to do something reckless? |
And while we're holding an inquisition, let me throw in a couple additional questions. Should borrowers who took on more than they could afford when the housing market was rising – and were able to bail out with six-figure profits – now be required to give those gains back? Or is risk-taking a one-way street, where you keep the gains when you win and the government picks up the tab when you lose?
Financial Freedom Means Being Accountable for Your Investment Decisions
Some people will accuse me of being hard-hearted. Go ahead. I've taken plenty of losses in my day. Any stock market investor worth his salt knows that's just part of the game.
I certainly would have liked Uncle Sam to reimburse me for the losses I took. But for the life of me, I can't figure out how I could justify asking for it.
As George Bernard Shaw said, "Liberty means responsibility. That is why most men dread it."
For more than three years, I've been writing that the housing bubble was an accident waiting to happen. Sky-high home prices were not the result of soaring inflation, a large increase in population, big gains in discretionary income, or any other fundamental factor. The foundation was simply low interest rates, EZ credit, and a firm conviction that real estate "always goes up."
It doesn't. According to Local Market Monitor, home prices in Los Angeles between 1990 and 1996 declined 21%. In Austin, TX, between 1986 and 1990, they declined 26%.
There are indications now that the national real estate market may be on its way to something similar. (Which, quite frankly, would only take home prices back to where they were a couple years ago.)
Is anyone to blame? Some fraudulent lenders, certainly.
But in a recent survey by Bankrate.com, homeowners with mortgages were asked whether they had a fixed-rate or adjustable loan. A whopping 34% said they had no clue.
Call me a grinch if you like, but if you walk away from a real estate closing with a loan that is several times the size of your annual income and you don't know what type of loan you've just taken out, that's not deception or duplicity…
That's just dumb.
Good investing,
Alex Green
Editor's note: Alex is one of the best analysts in the industry. His commentary on markets and managing your money are consistently insightful and thought-provoking.
Most recently, he and his colleagues at the Oxford Club have found a modern-day gold rush that opens up the opportunity for one of the biggest stock run-ups we've seen in years. One small company could double or even triple by the end of the year. To learn more about this incredible breakout – and access some of the Oxford Club's greatest ideas – click here.