Why our financial calamities are good

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Over the past few weeks we’ve had the subprime mortgage fallout playout in the stock markets. While the number of people that pay their mortgage is around 98%, it is not the 2% of mortgages that are not that caused the problem. It was the derivatives of these mortgages that caused problems. Often times using leverage of several times, coupled with a Japan carry trade, leverage and complex instruments caused the issues.

So why is this good?

Well if you own one of the companies you will certainly think it is not good for anyone. The fact is it is a natural correction. Think of nature. Things tend to naturally correct themselves. For the viability of the economic system you have to let things correct sometimes when they get ahead of themselves.

Now take a non-transparent country like China. While it is no secret their economy is growing like crazy, does anyone have an idea what’s really going on? Our subprime mess no doubt made the front page of international business papers everywhere. What happens when a bridge collapses in China? You have the “propoganda department” (that’s the real name) push out anyone and banning reporting on the incident. When our bridge collapsed on I35 it made international news with thorough detail.

When things are transparent, people can judge and make their adjustments in an orderly fashion (though it doesn’t seem so sometimes). Transparency is crucial. Corrections are normal in the overall scheme of things.

If your house appreciated 25%/year for 5 years would you say it is possible to sustain over a longer period of time? Most likely not, unless of course you are experiencing hyperinflation in your country.

So be realistic, let the system work, and be on the right side of your trades. Get out when you are unsure. Get back in when you are comfortable.

Financial calamities may not be good to you, but they are natural and that is better than an opaque system where things are allowed to get out of control.