A Major New Threat to Your Stock Portfolio

This article published with permission from InvestmentU.com.

A number of readers have asked me to weigh in on the Occupy Wall Street movement and what it means for the financial markets.

Let me begin by saying I sympathize with the anger and frustration of these protesters.

It’s maddening when you can’t find a job, pay your bills or plan for your retirement. It’s aggravating when your savings pay nothing. And I have no sympathy for the big wire houses. As I wrote in The Gone Fishin’ Portfolio, most Wall Street firms service their retail clients the way Bonnie and Clyde serviced banks.

Yet these demonstrators’ heads are leading them astray. If you want to examine who bears responsibility for the state of the economy, take a look at the facts, starting with the financial crisis of 2007 to 2009. Consider:

• The Federal Reserve took interest rates too low for too long, making mortgage loans dirt-cheap and priming the real estate bubble.
• Congress exempted the first $500,000 in capital gains on primary residences held for two years, creating a huge incentive for Americans to flip their homes.
• In a misguided effort to promote home ownership for everyone, both Republican and Democrat legislators passed laws effectively criminalizing banks that failed to lend to subprime borrowers (and particularly minority subprime borrowers).
• The federal government sponsored Fannie and Freddie — or (as I prefer) Phony and Fraudie — to warehouse these crummy loans and then put taxpayers on the hook to clean up the mess.
• The $615-trillion market for credit default swaps accelerated the financial collapse. These should have been traded through central clearinghouses, on exchanges that provide transparency. Who decided against this? Congress in December of 2000 by passing the Commodity Futures Modernization Act and preventing any real oversight of the over-the-counter derivatives markets.
• And who’s responsible for the regulation of banks, savings and loans, mortgage companies and rating agencies to make sure the mortgage market is fair and transparent? Why the federal government, of course.

The problem wasn’t corporate greed. It was government incompetence.

Sure, there’s plenty of blame to go around. For example, CEOs Jimmy Cayne of Bear Stearns, Dick Fuld of Lehman Brothers and Hank Greenberg of AIG all failed to understand the huge risk their own institutions were taking. Shareholders and employees of these firms suffered mightily as a result. There was plenty of collateral damage, too.

And let’s not forget the enemy in the mirror. After all, mortgage brokers don’t generally hogtie clients and force them to take out home loans at gunpoint. Plenty of Americans got caught up in the hoopla during the housing bubble and figured they could get rich in a hurry by flipping a house. That didn’t work out too well.

If there’s intense demand for home loans, however, the free market will provide them.

Understand that businesses compete for profits the way NFL teams compete for championships. If you attended a game where the referees let the players step out of bounds, spear, face mask or commit personal fouls without blowing the whistle, all hell would break loose.

That’s what happened in the recent financial crisis. Politicians and bank regulators knew that financial institutions weren’t requiring down payments from borrowers. They knew they weren’t verifying income or assets or borrowers’ ability to repay the loans.

They were supposed to officiate the game. But they didn’t.

As Berkshire Hathaway Vice-Chairman Charlie Munger pointed out, when a lion escapes from the zoo and injures someone, you don’t blame the lion. You blame the lion keeper. Federal regulators had all the tools they needed to protect us — and failed to use them. Now they’re blaming it on investment banks and “millionaires and billionaires.” And the Occupy Wall Street crowd is buying it.

Aside from aiding and abetting the recent the financial crisis, Congressmen in both political parties have grossly mismanaged the nation’s finances, running up trillions in debt and tens of trillions more in unfunded liabilities. (The debt now amounts to more than $1 million per taxpayer.) For a better picture of this fiasco, click here to see the National Debt Clock.

In short, rich people and Wall Street firms aren’t responsible for this state of affairs. Free-spending Congressmen are. Someone should tell the Wall Street occupiers to pick up camp and move over to 1st St. and East Capitol, the address of the Capitol Building.

Between protests they might also pick up a book by Adam Smith, Friedrich Hayek, or Milton Friedman. According to Douglas Shoen, a former pollster for Bill Clinton, surveys of the Occupy Wall Street protesters show they overwhelmingly favor “opposition to free market capitalism and support for radical redistribution of wealth, intense regulation of the private sector and protectionist policies to keep American jobs from going overseas.”

This didn’t work in the 1930s. And it won’t work today.

If voters, out of misguided populist anger, elect representatives who endorse these policies … well, at the very least it won’t be good for your stock portfolio.

Next year’s elections may well be the most important of your lifetime. Some Americans believe business is responsible for the country’s economic woes. Others believe it is government.

I say, “Let’s vote.”

Alexander Green is the chief investment strategist at InvestmentU.com. See more articles by Alexander here.