Sunday, August 12, 2007

Investing in castles made of sand

I don't claim to be anything close to an expert on finance or monetary policy, but the latest crisis causing global markets to bounce up and down seems to be pretty significant based on the reactions of people in the know. The Federal Reserve chairman, Ben Bernanke, is getting pressured to cut interest rates in order to build up the sagging housing market, and he's already injected billions of dollars into the lending pool in order to instill a little calm in jittery investors.

At the heart of the crisis in confidence is the shaky footing of several hedge funds that were heavily invested in subprime mortgages. Hedge funds are inherently risky, as their managers' intent is to maximize the return on investment. Subprime mortgages are loans wearing the rosiest of glasses, taking chances on folks who want to own homes but have bad credit histories. The combination of the two had as much chance for success as the Britney Spears - Kevin Federline marriage.

As the housing bubble started to leak air, in part due to higher interest rates the Fed put in place to dampen inflation, the risky recipients of the loans started defaulting en masse. Now the loan holders are grasping worthless notes, and the hedge funds that invested in these lenders are trying to cover their losses. Because only the rich get involved in hedge funds — you need a net worth of $5 million just to play this game of Risk — the immediate impact of their collapse is limited to a relatively small number of investors, but they are investors with both political and financial swagger. As they panic, the global markets fall into line behind them.

The more I read about it, the more it seems like our whole mess of an economy is built on a foundation of sand, waiting for the first good wave of reality to level it all off. Those on the very top will have the furthest to fall, but they have the rest of us at the bottom to cushion the blow. There are already loud calls for a bailout of the hedge fund managers (see the New York Times story Market Swings Are First Crisis for Fed Chairman), which of course would come at the expense of we ordinary tax payers who are playing a much different game of risk — blindly trundling along with the economy hoping our paychecks will cover our mounting costs, and leaving our fate in the corrupt hands of the politicians big business lets represent us.

Maybe it's best to adopt a zen attitude, and accept the impermanence of all worldly things. Put on some Jimi Hendrix, sit quietly in a room with legs folded, and repeat the mantra sure to please those in power: "Everything is going to be ok." It was a good ride while it lasted, and we'll always have our memories.

Castles Made of Sand
by Jimi Hendrix

Down the street you can hear her scream you're a disgrace
As she slams the door in his drunken face
And now he stands outside
And all the neighbours start to gossip and drool
He cries oh, girl you must be mad,
What happened to the sweet love you and me had?
Against the door he leans and starts a scene,
And his tears fall and burn the garden green

And so castles made of sand fall in the sea, eventually

A little indian brave who before he was ten,
Played wargames in the woods with his indian friends
And he built up a dream that when he grew up
He would be a fearless warrior indian chief
Many moons past and more the dream grew strong until
Tomorrow he would sing his first war song and fight his first battle
But something went wrong, surprise attack killed him in his sleep that night

And so castles made of sand melts into the sea, eventually

There was a young girl, whose heart was a frown
'Cause she was crippled for life, and she couldn't speak a sound
And she wished and prayed she could stop living,
So she decided to die
She drew her wheelchair to the edge of the shore
And to her legs she smiled you won't hurt me no more
But then a sight she'd never seen made her jump and say
Look a golden winged ship is passing my way
And it really didn't have to stop, it just kept on going...

And so castles made of sand slips into the sea, eventually
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