Lehman Fails, Merrill Sold, Fannie & Freddie Rescued - How Can This Be Good?

The headlines certainly portend a very dicey time for the world economic system. However, at a very personal level, these watershed events can be good (in the end) for you and me - the average consumer. How, do you ask, can seismic disruptions to the world financial market benefit you?

Let's take a look at the bigger picture. You and I live our daily lives in what we can call "The Real Economy." That is to say, we spend the money in our wallets to buy tangible "stuff" every day like food, clothes, gas, etc. We operate our finances in a pretty simple way, too. It's basic, spend less than you make so that your have more than you need at the end of each day. Otherwise, you go into debt. Either you can service (pay for) that debt, or you can not. If you can not, you go bankrupt. It's really that simple. Large financial institutions operate in more of an economy of the ether (air). In that they buy and sell futures, derrivatives, futures on bets on what the federal reserve will do, long term bonds, short term bonds, corporate bonds, government bonds, municipal bonds, school bonds, etc., etc., etc. Some of these things are real what I would call "real" like stocks, real estate and bonds. Other instruments, though, are more "in the ether" and where this all comes unwound. Instruments like derrivatives, futures and the like are bets on what things "should" do - and by their nature - contain much more risk. Now, I'm watering this down a LOT - so, those of you reading who will take issue, your objection is duely noted.

All that said, we will see more banks and brokerages fail. As taxpayers, we will feel some pain from this as the US Government will (and already has) participated in the mop-up that ensues watershed events such as these. The bankruptcy filing by Lehman Brothers comes in at a whopping $613,000,000,000.00 (BILLION with a B). That dwarfs the previous filing of Worldcom in 2002, Enron in 2001 and Drexel Burnham Lambert in 1986. How can this be good? When these events unwind, the initial period is often akin to a REALLY bad case of the flu. You feel sick to your stomach, there's no end in sight, you can't sleep...there's just nothing that good about it. When the dust settles, there are fewer players in the game. The rules have typically been reset in such a way that new controls are in place to keep some of the bad things from happening again in the future. And, some unexpected good things will happen. For instance, mortgage rates will come down as a result of this as investors - both individual and institutional - seek the relative security of long-term bond investments vs. riskier hybrid and stock investments.

Along with that, the fall of one or two more big players in the financial services sector will be good for the larger economy in time. Sometimes you can have too much of a good thing. Too many players doing the same thing in the same space with the same money leads to a house of cards being built up....which has to fall. Today, we see the fall of two giants in the form of Merrill Lynch and Lehman Brothers. Stay tuned, it's just going to get more interesting from here. As Neil Peart says..."Adventures Suck When You're Going Through Them!"

We will look back at these times as an adventure - perhaps not an enjoyable one - but, an adventure none-the-less. Look for rates to move lower this week...which could actually spur positive activity for the housing market....which, is good for the broader US Market....see, a silver lining!