— “Ahead of the Street” Column, by Mitchell Clark, B. Comm.
There’s a very important report from the independent watchdog at the Treasury Department about the entire bailout process and the enormous TARP spending that’s been taking place. The special inspector general for the TARP program painted a decidedly troublesome picture of the current landscape.
In his report, Neil Barofsky noted that the very problems that led to the recent financial crisis have not been addressed and, in some cases, are actually growing worse. Barofsky wrote that the largest financial institutions are still taking on too many risks and are doing so because they know that the government will be there to bail them out. He is calling for meaningful regulatory reform for these institutions and he also says that current Federal Reserve policy risks creating another housing bubble, then another crash. When the cash stimulus from government is turned off (including interest rates that are low), there could be a dramatic decline in housing prices.
It’s all part of the same argument that Jim Rogers has been making ever since the financial crisis took hold. The economy was not allowed to correct itself because of government intervention. The bad assets were simply transferred away from bad managers onto the shoulders of taxpayers. It happened to the biggest financial institutions and it’s happening now in the housing market. Jim Rogers’ view is that government intervention itself prolongs the problem and actually makes the consequences worse for individuals.
If you get the opportunity, take a glance at Barofsky’s report. It would seem that we’re in more of a pickle than we think we are.
The whole thing makes me more cautious about investing and the current state of things. It also gives me pause about the recovery in the housing market, which is one of the most crucial aspects of the fragile economy.
Last year, I remember writing that investors are likely to go back to the old days, when people with money to invest chose solid, dividend-paying companies. For the most part, my parents’ generation didn’t have 6,000-sq.-ft. homes with multi-million-dollar mortgages. People didn’t speculate much at all. I sense we’re headed down a similar path again. So, if you believe Barofsky’s conclusions, the best investment strategy going forward would be to pay down debt as much as possible, not to buy too much house, to consider dividend-paying companies, gold and a little China, and basically to be conservative with your money. It’s a common sense approach that I think will work out just fine this decade.