icandoitdon

Industries to Avoid, Industries to Buy

i want to give my "fair and balanced" view of the comments to the author's post.

the principle objections focus on his belief in the need for regulation and his specific suggestion that oil company profit margins be regulated. for this he has been called...evil of evils...a liberal, a populist, a socialist and a communist. and ignorant ones at that.

i do agree in principle that in a market economy, direct regulation of company profits should be undertaken only under conditions of pure monopoly. other than that, regulation in a capitalistic system is not only reasonable but it is necessary..even if we don't always do the best job...and i'll explain why momentarily.

as for regulating oil company profit margins, never mind my idealological view....i just don't think it would make a nickel's worth of difference to the consumer. if it isn't effective, why bother? i don't give a damn about saving a nickel or dime on gasoline when i'm already paying $3.50 a gallon.

here's why i believe regulation is a necessary evil:

it is the nature of a free market capitaist to charge as much as he can and gives as little as possible of his product in exchange. competition is what keeps the predatory side of capitalism in check and it is why monopolies must be regulated.

but the system doesn't work perfectly. it doesn't always protect against fraud or even abuse. a scammer can scam the public before he or a regulator knows he's been scammed.

take, for example, the roots of the current credit crisis:

there was a time when most home loans were given by banks under federal or state charter. they had strict regulatory requirements as to capital, loan to capital ratios, etc....and the system worked fine for many years.

but things change. enter unregulated "mortgage companies" equipped with new financing vehicles like variable-rate loans, teaser interest rates, no money down, home equity loans, etc. etc., ad infinitum. then enter securitization, where these financial institutions sold the loans in packages to investment houses looking for better yields, made possible by rating agencies who slapped AAA credit ratings on instruments that they had never before rated.

the demand for housing exploded as new homeowners crowded into the market. prices escalated. some homeowners traded up...many tapped some of their equity to buy "stuff."

the music stopped when prices started to fall. and that's where we are today.

for those who say....tough....let it happen....that's what capitalism is all about....i'm with you. i could care less about the moron who bought a house he couldn't afford for no money down. but that's not what our government thinks.

ben bernacke has urged congress to bail homeowners out just as he bailed out bear stearns. (and yes he did bail out bear stearns...not to save bear stearns....but to save the counterparties who would have been decimated by a bear stearns bankruptcy.)

what would you rather have? bailout? or enough regulation to have prevented the problem in the first place. such regulation might have included:

1. minimum requirements of downpayment, e.g. 10%. can't afford it? tough...find an apartment.

2. restrictions on variable rate financing. allow them with higher downpayment, e.g. 20%....or permit them for a maximum term of 1 year to minimize the risk of getting buried because of a surge in interest rates.

3. limit home equity loans to require a minimum of 20% equity interest in the property.

4. eliminate tax deductibility of mortgage interest for second homes.

etc etc etc

anyone who doesn't like this should find a country that practices pure capitalism. trouble is it doesn't exist, so you'll have to start your own.

Industries to Avoid, Industries to Buy

"I'm actually surprised no one has created an Iraq-related ETF consisting of these and other companies."

great idea. it could be called the "iraqi freedom fund."