Thursday, October 23, 2008

The Mismanagement of Our Values

Since we all speak from ignorance and I'm no different, I might as well add my vioce to the cacophony. Actually, everyone seems to be buzzing about the election right now and only talking about the economy inasmuch as it affects the outcome of the election. To be sure, I'm not a McCain fan, but he's a far cry better than Obama. I just can't figure out if Obama is more socialist or more Muslim. I could be mistaken, but the last I heard, he wants to take the oath of office on a Koran. I've always considered that one day we may see a showdown between the socialists and the Muslims in their quest for world domination. I'd just like to know which side Obama is really on.

Anyway, since everyone is bothered by the election and talk about the economy has waned slightly, I figured I would add my words of great ignorance to everyone else's. Considering that I supposedly don't even have good common sense, this should be interesting.

What is economic value? It's the value we all agree that an object has. This "object" could be a tangible item or a service that someone provides. For manufactured items, value is assessed in three categories: Material, Labor and Overhead. The value of materials is assessed from the labor required to render (produce, mine, refine, whatever) the materials themselves and the value assigned by any market on those values. Real market values are adjustments to the labor required to render the materials. False market values are artificially manipulated adjustments due to undue control over inventory and other such regulations. Overhead is a combination of real costs added such as physical plant costs (building, energy, machinery, depreciation), taxes and various support services (administrative personnel, benefits, shipping, sales commissions, advertising, etc.).

So, all value can be traced back to labor and tangible assets and both are subject to adjustment according to market forces. Labor is subject to market forces based on the demand for the labor caried out. For example, someone can work very hard digging a hole that no one wants. Who's going to pay him for it? It's a worthless hole an he has labored in vain. Someone else, without breaking a sweat, can have an idea for organizing other people to work that will produce vast amounts of wealth. The nearly 500 people wher I work result in millions of dollars a year in sales. What do we do with all that money? Well, I keep only a small fraction of it and everybody else here gets a small amount of it. None of us would be able to do anything except that someone took an initial risk on the venture and put up the millions of dollars to get us all started. Those investors deserve some of the profits commensurate with the size of their investment. We are competing with other companies making similar products and have to keep streamlined in order to win the sales. I don't have the knowledge, experience or business acumen to be very effective at guiding our efforts, but someone does. I may or may not agree with our corporate leadership's direction, but they are effective in keeping us in business. Otherwise, I have to think of some other way to provide for my family. Therefore, they deserve a healthy portion of the company's profits.

But, certain value is placed on things aside from any labor that went into them. Gold is one. There is some initial labor to mine and refine the stuff. However, there is some market for it. people want to buy it as an investment. They believe they can sell it or trade it later for something they really need for more than the initial investment. There seems to be a trend of people buying gold tomorrow for more than they bought it yesterday that is consistent enough to expect that to continue. This seems rather arbitrary to me. There is no intrinsic value in gold. There is only the value we all decide that it should have. You can't eat it and it's not practical as a building or clothing material. The only thing it's good for is mere adornment or keeping vaults from blowing away.

There's also real estate. This seems to have a more intrinsic value to it. We need a portion of earth on which to stand and on which to build shelter in which to reside. If you come to an undeveloped piece of land, certain labor must be applied to make it suitable to live on. It must be cleared to some extent and a house built on it. Once the house it built and the labor done, you may expect that no labor value can be added since it's already paid for. (I'm not getting into collateral value for the purposes of usury at this point.) However, the value is yet subject to the market. If two pieces of land are being considered by a buyer for a house where one piece of land has a house on it and the other doesn't, the buyer will consider it worthy to buy the land with the house if it's not much more thatn the land without the house since he would have to consider the additional value of developing the land and building a house there. So, land with a house on it has greater value than land without a house even though the labor has long been done and paid for to build the house.

Furthermore, houses come into disrepair if they are not maintained. Mainting a house can help maintian the value of the house or even increase its value despite the fact that the house ages. Older houses may depreciate, but many also gain character. This is a value that is a bit more arbitrary, but enough people seek the character of older homes to make it a more well-established increase in value. There is also the value of location. Houses in or near town tend to be higher in value because of their convenient proximity to various services.

Since real estate has this kind of value and because it is a necessity, it is a good investment. Home owners use their homes as investments. Money lenders use real estate as investemts by lending money to home owners against the value of the home. This is a mortgage. The return on the investment in the loan was the interest (kind of like paying rent on money) due. If something happened and the home owner couldn't pay back the loan, then the money lender would forclose and the property would belong to the money lender to recoup the money they loaned, thus guaranteeing the investment.

Investors began to see the value of buying and selling mortgages. Money lenders would set up the initial mortgage and earn the fees. Then they would sell the mortgage to an investor, who would expect to benefit from collecting the interest. This investor could also decide to resell the mortgage under the pretense that the value of the property would increase. If the home owner could be expected to repay the mortgage in a timely fashion, this doesn't mean much. However, if the homeowner was expected to default on the loan, then the property at the increased value would belong to the investor holding the mortgage ostensibly for more than they paid for the mortgage. That is, unless, the mortage was like a hot-potato where the value of the actual property was less than the mortgage was being exchanged for. In other words, whover has the mortagage last gets stuck with a loss.

A sub-prime mortgage is one where the value of the property is expected to decrease rather than increase. The home may be in poor repair and renovation is not reasonably cost-effective. Or the land may exist in a area where the neighborhood is delapidated in general, the land is decreasing in value and the only hope is for commercial development of the area. If the sub-prime loan is made to someone who cannot be expected to repay the mortgage, then you have an investment nightmare in the making. When such mortgages are mixed in with good mortgages and traded en masse, then you have an inequitable exchange. Good value is being exchanged for low value. So, an investor may end up with a pile of notes he thinks is worth something. He has invested in future value that will never happen. When the true value is revealed he thinks he has suffered a loss. He suffered the loss when he traded something of high value for something of low value. The revelation of the truth, what we might call a correction in the market, didn't cause him to lose money because no one can lose something they don't have.

We still have the same value in the system. People still work and homes still have value, but some investors who managed to sell bad mortgages for a profit wak away with free money.

It's these investors that lost money that the government has decided to "bail out". In other words, as a nation, we have decided to cover the false value of the mortgages. The government can do this a number of ways. Officials can raise taxes which means that our real work will be applied to the problem. They can print more money which means that the real value of each dollar that we have will decrease. So, while we make the same number of dollars, we are actually getting paid less in value. The government can sell bonds, which are an investment in the growth of government. Yikes! In any event, the extra money ultimately goes into the pockets of the theif investors that originally sold the bad mortgages to begin with.

Here's where it gets strange. Many of the investors doing this did so with funds wherein we have our retirement CDs and 401Ks or our companies where we may still have a pension have placed our pension money there. Oops. It seems most of those investors are us by proxy.

Folks, we've trusted others to invest our money wisely for us and we have been mismanaged; and it was legal. We have our corrupt representatives to thank. Remember this at the polls if you haven't yet voted.

By the way, this is intricately linked with the mismanagement of our moral values in this way: We often look to politics or Hollywood for culpability. However, we have only ourselves to blame. They all pander to our self-satiating desires, and have mismanaged our trust in them.

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