In the 1980’s the economy was growing strong enough that the average person was starting to interest himself in investments outside his home and savings accounts. Penny Stocks became the rage. Small start-up companies around the country were looking for capital without giving away half ownership in their companies to investment bankers. They found backers in small independent penny stock brokerage firms. These investment brokerage firms underwrote and merged small firms into public corporations with just a few millions capitalization. Everyone hoped the gamble would pay off against long odds. These small mining, manufacturing, drug, brewing companies, etc. would prove to be a big risk for the small investor. Many companies failed, and some stock brokerage firms were guilty of exploiting small investors by putting them into investments that were too risky. Consequently they lost money they couldn’t afford to. Many companies did go on to achieve great success earning their small investors huge returns like, Microsoft, Apple, etc.. These companies were too small originally to attract investment from the large brokerage firms like Merrill Lynch, Bear Stearns, etc.. These big firms do not generally bother with a few million dollar under writings.
Because of a few unscrupulous brokerage firms in the eighties the SEC had more than fifty percent of the small independent firms shut down by implementing a catch-all compliance rule that all investment houses must follow called, “The Suitability Clause” which asks, “Is the investment suitable for the investor?” The suitability clause was and is a government bureaucratic nightmare for all brokerage houses that pretty much closed the door for small companies going public with just a few million dollars capitalization.
In the 1990’s the stock market took off. 401K’s were suddenly making everyone rich share holders in the booming stock market. Stocks for corporations and investors were making money hand over fist and those 401k’s were making everyone look like over night millionaires. Then there was a scandal, and another one, and all of a sudden some people lost money and the stock market balloon burst. Those same retirement account’s were taking a big hit. The SEC catch-all-rule of suitability seemed to come into play again with the government stepping in and throwing a few people in jail and heavy handedly changing accounting rules for corporations and brokerage houses.
Next, in the late 1990’s, to the mid 2000’s, the housing market went crazy. Every year saw five to ten percent growth in housing prices. Everyone that had been renting was now buying. Builders were building like crazy, investment bankers were offering more and more types of loans with more and more creative financing to meet just about every type of credit buyer. Sub prime loans were the rage. Everyone was buying and refinancing a couple of years later at new lower rates. Everyone was suddenly finding equity in their home that just a few years before they had purchased for nothing down. Flipping houses was so popular it even got it’s own TV show.
Creative financing for housing moved up to the big investment bankers who provided money to smaller brokerage firms because the risk reward ratio seemed to attractive too pass up. Then, because of overbuilding, falling prices, and short term sub-prime adjustable rate mortgages of, one, two, and three years started becoming due or rates re-adjusted. Failures began appearing and in a vicious cycle, news of these failures began spreading, housing stocks began to fall, home prices began to fall, lenders began to require better and better credit ratings. Suddenly, there was no new money for mortgages and the housing bubble burst. Who cried the loudest, besides the media? The government. The media and government blamed the speculating investment bankers, the investment bankers blamed the mortgage companies for low lending standards and the mortgage bankers blamed the borrowers for lying about their credit, their ability to pay and not reading their contracts. Wall street and the investment bankers were suddenly conscious of their mortgage portfolios. They didn’t know what percent of their assets were quality assets so they started writing them off. Now they want the government to reimburse them for their losses with tax payer money.
So, because of the overall perceived economic crisis, and for political reasons, the government wants to appear that they are coming to the people’s rescue with a bailout. First to the general public, then next to the investment banking houses. Then as a penalty for causing the embarrassing problem, the government will implement new suitability rules for mortgage borrowers that will be enforced by some new law.
Every time more stringent government suitability rules are implemented it stifles the future economy. After every crisis the government steps in and slaps the capitalist’s hand and further quashes growth in the overall economy. The government has to let the people and corporations be responsible enough for failure. They take the risk, so long as it’s not fraudulent, and they must take the loss when they over speculate.
Many small companies got their start up capital in the eighties by going public until the government pretty much closed the door.
Many workers in the nineties became share holders for the first time in their lives then the Dot Com bubble burst. Investors are now more cautious, but the government not satisfied and not wanting further embarrassment, has imposed accounting rules that make 401k’s more conservative and less attractive for corporations to manage and offer it’s employees.
In the new millennium, ninety four percent of new mortgage holders are paying their mortgages on time. They own houses they never would have been able to buy with out sub-prime lenders. Some sub prime lenders are getting burnt so now they will be more discriminate with loans, but the government plans to step in suggesting we make laws that go back to self-imposed rules-by-lenders that were prevalent in the sixties when you needed twenty per cent down to buy a home.
When corporations and individuals make bad decisions, without breaking the law, it seems to be an excuse for the government to impose new rules. New government rules against creativity kill creative venture capital, the life blood of a healthy growing economy.
What happened to buyer beware and act responsibly?
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